Is Titagarh Rail Systems (NSE:TITAGARH) A Risky Investment?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Titagarh Rail Systems Limited (NSE:TITAGARH) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.

View our latest analysis for Titagarh Rail Systems

How Much Debt Does Titagarh Rail Systems Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Titagarh Rail Systems had ₹3.97b of debt, an increase on ₹2.60b, over one year. However, its balance sheet shows it holds ₹5.71b in cash, so it actually has ₹1.74b net cash.

How Strong Is Titagarh Rail Systems' Balance Sheet?

According to the last reported balance sheet, Titagarh Rail Systems had liabilities of ₹9.57b due within 12 months, and liabilities of ₹2.50b due beyond 12 months. Offsetting this, it had ₹5.71b in cash and ₹8.87b in receivables that were due within 12 months. So it can boast ₹2.51b more liquid assets than total liabilities.

This short term liquidity is a sign that Titagarh Rail Systems could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Titagarh Rail Systems has more cash than debt is arguably a good indication that it can manage its debt safely.

Also good is that Titagarh Rail Systems grew its EBIT at 20% over the last year, further increasing its ability to manage debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Titagarh Rail Systems can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Titagarh Rail Systems 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. During the last three years, Titagarh Rail Systems burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While it is always sensible to investigate a company's debt, in this case Titagarh Rail Systems has ₹1.74b in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 20% over the last year. So we don't have any problem with Titagarh Rail Systems's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 1 warning sign for Titagarh Rail Systems you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.