Is Welspun Enterprises (NSE:WELENT) A Risky Investment?

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Welspun Enterprises Limited (NSE:WELENT) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Welspun Enterprises

What Is Welspun Enterprises's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Welspun Enterprises had ₹7.27b of debt in September 2023, down from ₹9.39b, one year before. But it also has ₹9.23b in cash to offset that, meaning it has ₹1.96b net cash.

How Healthy Is Welspun Enterprises' Balance Sheet?

The latest balance sheet data shows that Welspun Enterprises had liabilities of ₹17.4b due within a year, and liabilities of ₹8.85b falling due after that. Offsetting these obligations, it had cash of ₹9.23b as well as receivables valued at ₹10.9b due within 12 months. So it has liabilities totalling ₹6.07b more than its cash and near-term receivables, combined.

Given Welspun Enterprises has a market capitalization of ₹42.7b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Welspun Enterprises also has more cash than debt, so we're pretty confident it can manage its debt safely.

In addition to that, we're happy to report that Welspun Enterprises has boosted its EBIT by 81%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Welspun Enterprises's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Welspun Enterprises may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, Welspun Enterprises saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

Although Welspun Enterprises's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of ₹1.96b. And we liked the look of last year's 81% year-on-year EBIT growth. So we are not troubled with Welspun Enterprises's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 2 warning signs we've spotted with Welspun Enterprises .

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.