Here's Why Amber Enterprises India (NSE:AMBER) Has A Meaningful Debt Burden

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Amber Enterprises India Limited (NSE:AMBER) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. 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 Amber Enterprises India

What Is Amber Enterprises India's Net Debt?

As you can see below, at the end of March 2024, Amber Enterprises India had ₹14.3b of debt, up from ₹13.4b a year ago. Click the image for more detail. However, because it has a cash reserve of ₹7.98b, its net debt is less, at about ₹6.36b.

How Healthy Is Amber Enterprises India's Balance Sheet?

According to the last reported balance sheet, Amber Enterprises India had liabilities of ₹32.9b due within 12 months, and liabilities of ₹11.9b due beyond 12 months. Offsetting these obligations, it had cash of ₹7.98b as well as receivables valued at ₹15.7b due within 12 months. So it has liabilities totalling ₹21.1b more than its cash and near-term receivables, combined.

Since publicly traded Amber Enterprises India shares are worth a total of ₹128.4b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

Given net debt is only 1.3 times EBITDA, it is initially surprising to see that Amber Enterprises India's EBIT has low interest coverage of 1.8 times. So one way or the other, it's clear the debt levels are not trivial. Importantly Amber Enterprises India's EBIT was essentially flat over the last twelve months. We would prefer to see some earnings growth, because that always helps diminish debt. 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 Amber Enterprises India 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So it's worth checking how much of that EBIT is backed by free cash flow. In the last three years, Amber Enterprises India created free cash flow amounting to 4.9% of its EBIT, an uninspiring performance. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Our View

Both Amber Enterprises India's interest cover and its conversion of EBIT to free cash flow were discouraging. At least its net debt to EBITDA gives us reason to be optimistic. Taking the abovementioned factors together we do think Amber Enterprises India's debt poses some risks to the business. While that debt can boost returns, we think the company has enough leverage now. Given our hesitation about the stock, it would be good to know if Amber Enterprises India insiders have sold any shares recently. You click here to find out if insiders have sold recently.

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.