Is Thejo Engineering (NSE:THEJO) A Risky Investment?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Thejo Engineering Limited (NSE:THEJO) makes use of debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Thejo Engineering

What Is Thejo Engineering's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2023 Thejo Engineering had ₹203.3m of debt, an increase on ₹153.5m, over one year. But on the other hand it also has ₹451.4m in cash, leading to a ₹248.1m net cash position.

How Healthy Is Thejo Engineering's Balance Sheet?

We can see from the most recent balance sheet that Thejo Engineering had liabilities of ₹1.08b falling due within a year, and liabilities of ₹425.7m due beyond that. On the other hand, it had cash of ₹451.4m and ₹1.30b worth of receivables due within a year. So it can boast ₹244.2m more liquid assets than total liabilities.

This state of affairs indicates that Thejo Engineering's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the ₹22.0b company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that Thejo Engineering has more cash than debt is arguably a good indication that it can manage its debt safely.

On the other hand, Thejo Engineering saw its EBIT drop by 6.2% in the last twelve months. That sort of decline, if sustained, will obviously make debt harder to handle. There's no doubt that we learn most about debt from the balance sheet. But it is Thejo Engineering's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Thejo Engineering has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Looking at the most recent three years, Thejo Engineering recorded free cash flow of 26% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While it is always sensible to investigate a company's debt, in this case Thejo Engineering has ₹248.1m in net cash and a decent-looking balance sheet. So we don't have any problem with Thejo Engineering's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 1 warning sign we've spotted with Thejo Engineering .

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.