Is Indian Railway Catering & Tourism (NSE:IRCTC) 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 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. Importantly, Indian Railway Catering & Tourism Corporation Limited (NSE:IRCTC) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Indian Railway Catering & Tourism

What Is Indian Railway Catering & Tourism's Net Debt?

As you can see below, at the end of September 2021, Indian Railway Catering & Tourism had ₹1.08b of debt, up from none a year ago. Click the image for more detail. However, its balance sheet shows it holds ₹20.7b in cash, so it actually has ₹19.6b net cash.

How Strong Is Indian Railway Catering & Tourism's Balance Sheet?

According to the last reported balance sheet, Indian Railway Catering & Tourism had liabilities of ₹15.4b due within 12 months, and liabilities of ₹1.94b due beyond 12 months. Offsetting these obligations, it had cash of ₹20.7b as well as receivables valued at ₹5.52b due within 12 months. So it actually has ₹8.81b more liquid assets than total liabilities.

This state of affairs indicates that Indian Railway Catering & Tourism's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the ₹647.5b company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that Indian Railway Catering & Tourism has more cash than debt is arguably a good indication that it can manage its debt safely.

Better yet, Indian Railway Catering & Tourism grew its EBIT by 223% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Indian Railway Catering & Tourism 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Indian Railway Catering & Tourism 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, Indian Railway Catering & Tourism recorded free cash flow worth a fulsome 82% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Indian Railway Catering & Tourism has net cash of ₹19.6b, as well as more liquid assets than liabilities. The cherry on top was that in converted 82% of that EBIT to free cash flow, bringing in ₹3.8b. So we don't think Indian Railway Catering & Tourism's use of debt is risky. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Indian Railway Catering & Tourism's earnings per share history for free.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.