Is Welspun Enterprises (NSE:WELENT) 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. We note that Welspun Enterprises Limited (NSE:WELENT) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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 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 Debt?

As you can see below, Welspun Enterprises had ₹7.54b of debt at March 2023, down from ₹25.3b a year prior. But it also has ₹18.4b in cash to offset that, meaning it has ₹10.9b net cash.

A Look At Welspun Enterprises' Liabilities

The latest balance sheet data shows that Welspun Enterprises had liabilities of ₹20.4b due within a year, and liabilities of ₹7.04b falling due after that. Offsetting these obligations, it had cash of ₹18.4b as well as receivables valued at ₹9.71b due within 12 months. So it actually has ₹682.0m more liquid assets than total liabilities.

This state of affairs indicates that Welspun Enterprises' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the ₹36.0b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, Welspun Enterprises boasts net cash, so it's fair to say it does not have a heavy debt load!

Pleasingly, Welspun Enterprises is growing its EBIT faster than former Australian PM Bob Hawke downs a yard glass, boasting a 106% gain in the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. 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 company can only pay off debt with cold hard cash, not accounting profits. While Welspun Enterprises 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, Welspun Enterprises burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While it is always sensible to investigate a company's debt, in this case Welspun Enterprises has ₹10.9b in net cash and a decent-looking balance sheet. And we liked the look of last year's 106% year-on-year EBIT growth. So we don't have any problem with Welspun Enterprises's use of debt. 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. Be aware that Welspun Enterprises is showing 3 warning signs in our investment analysis , and 1 of those is a bit concerning...

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.