Is Walchandnagar Industries (NSE:WALCHANNAG) Using Too Much Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Walchandnagar Industries Limited (NSE:WALCHANNAG) does carry debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Walchandnagar Industries

What Is Walchandnagar Industries's Debt?

As you can see below, Walchandnagar Industries had ₹2.41b of debt at March 2024, down from ₹2.93b a year prior. However, because it has a cash reserve of ₹1.11b, its net debt is less, at about ₹1.30b.

How Healthy Is Walchandnagar Industries' Balance Sheet?

According to the last reported balance sheet, Walchandnagar Industries had liabilities of ₹4.37b due within 12 months, and liabilities of ₹774.2m due beyond 12 months. Offsetting this, it had ₹1.11b in cash and ₹2.45b in receivables that were due within 12 months. So its liabilities total ₹1.59b more than the combination of its cash and short-term receivables.

Of course, Walchandnagar Industries has a market capitalization of ₹15.1b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Walchandnagar Industries will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Walchandnagar Industries made a loss at the EBIT level, and saw its revenue drop to ₹3.0b, which is a fall of 6.1%. We would much prefer see growth.

Caveat Emptor

Over the last twelve months Walchandnagar Industries produced an earnings before interest and tax (EBIT) loss. Indeed, it lost ₹137m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. We would feel better if it turned its trailing twelve month loss of ₹418m into a profit. So to be blunt we do think it is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example - Walchandnagar Industries has 1 warning sign we think you should be aware of.

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.

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