These 4 Measures Indicate That Flair Writing Industries (NSE:FLAIR) Is Using Debt Reasonably Well

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.' 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 Flair Writing Industries Limited (NSE:FLAIR) 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Flair Writing Industries

How Much Debt Does Flair Writing Industries Carry?

You can click the graphic below for the historical numbers, but it shows that Flair Writing Industries had ₹222.3m of debt in September 2024, down from ₹1.63b, one year before. But on the other hand it also has ₹1.80b in cash, leading to a ₹1.57b net cash position.

How Healthy Is Flair Writing Industries' Balance Sheet?

According to the last reported balance sheet, Flair Writing Industries had liabilities of ₹1.43b due within 12 months, and liabilities of ₹522.4m due beyond 12 months. On the other hand, it had cash of ₹1.80b and ₹2.40b worth of receivables due within a year. So it can boast ₹2.24b more liquid assets than total liabilities.

This short term liquidity is a sign that Flair Writing Industries could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Flair Writing Industries boasts net cash, so it's fair to say it does not have a heavy debt load!

On the other hand, Flair Writing Industries's EBIT dived 13%, over the last year. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Flair Writing Industries can strengthen its balance sheet over time. 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 Flair Writing Industries 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. Considering the last three years, Flair Writing Industries actually recorded a cash outflow, overall. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.

Summing Up

While it is always sensible to investigate a company's debt, in this case Flair Writing Industries has ₹1.57b in net cash and a decent-looking balance sheet. So we are not troubled with Flair Writing Industries's debt use. 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 Flair Writing Industries 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.