We Think Indian Railway Catering & Tourism (NSE:IRCTC) Can Stay On Top Of Its Debt

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 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?

What Risk Does Debt Bring?

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. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Indian Railway Catering & Tourism

How Much Debt Does Indian Railway Catering & Tourism Carry?

You can click the graphic below for the historical numbers, but it shows that Indian Railway Catering & Tourism had ₹668.0m of debt in September 2023, down from ₹1.78b, one year before. However, it does have ₹20.3b in cash offsetting this, leading to net cash of ₹19.6b.

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

Zooming in on the latest balance sheet data, we can see that Indian Railway Catering & Tourism had liabilities of ₹24.7b due within 12 months and liabilities of ₹2.37b due beyond that. Offsetting these obligations, it had cash of ₹20.3b as well as receivables valued at ₹14.6b due within 12 months. So it can boast ₹7.82b more liquid assets than total liabilities.

Having regard to Indian Railway Catering & Tourism's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the ₹743.4b 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 17% 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're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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. Looking at the most recent three years, Indian Railway Catering & Tourism recorded free cash flow of 41% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying 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. And it impressed us with its EBIT growth of 17% over the last year. So is Indian Railway Catering & Tourism's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 1 warning sign with Indian Railway Catering & Tourism , and understanding them should be part of your investment process.

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.