Is Indian Railway Catering & Tourism (NSE:IRCTC) Using Too Much Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Indian Railway Catering & Tourism Corporation Limited (NSE:IRCTC) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Indian Railway Catering & Tourism

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

You can click the graphic below for the historical numbers, but it shows that Indian Railway Catering & Tourism had ₹841.6m of debt in March 2023, down from ₹1.07b, one year before. However, it does have ₹19.3b in cash offsetting this, leading to net cash of ₹18.5b.

A Look At Indian Railway Catering & Tourism's Liabilities

We can see from the most recent balance sheet that Indian Railway Catering & Tourism had liabilities of ₹23.9b falling due within a year, and liabilities of ₹2.19b due beyond that. On the other hand, it had cash of ₹19.3b and ₹14.0b worth of receivables due within a year. So it actually has ₹7.19b 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 ₹550.7b 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.

And we also note warmly that Indian Railway Catering & Tourism grew its EBIT by 20% last year, making its debt load easier to handle. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Indian Railway Catering & Tourism'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. While Indian Railway Catering & Tourism 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. In the last three years, Indian Railway Catering & Tourism's free cash flow amounted to 45% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

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 ₹18.5b, as well as more liquid assets than liabilities. And we liked the look of last year's 20% year-on-year EBIT growth. So is Indian Railway Catering & Tourism's debt a risk? It doesn't seem so to us. 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. For example, we've discovered 1 warning sign for Indian Railway Catering & Tourism that you should be aware of before investing here.

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.