Is Essen Speciality Films (NSE:ESFL) Using Too Much Debt?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. Importantly, Essen Speciality Films Limited (NSE:ESFL) does carry debt. But should shareholders be worried about its use of debt?

This technology could replace computers: discover the 20 stocks are working to make quantum computing a reality.

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. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

How Much Debt Does Essen Speciality Films Carry?

The image below, which you can click on for greater detail, shows that at March 2025 Essen Speciality Films had debt of ₹174.6m, up from none in one year. But on the other hand it also has ₹252.9m in cash, leading to a ₹78.3m net cash position.

A Look At Essen Speciality Films' Liabilities

We can see from the most recent balance sheet that Essen Speciality Films had liabilities of ₹376.6m falling due within a year, and liabilities of ₹13.2m due beyond that. Offsetting these obligations, it had cash of ₹252.9m as well as receivables valued at ₹415.6m due within 12 months. So it actually has ₹278.7m more liquid assets than total liabilities.

This surplus suggests that Essen Speciality Films has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Essen Speciality Films has more cash than debt is arguably a good indication that it can manage its debt safely.

View our latest analysis for Essen Speciality Films

But the other side of the story is that Essen Speciality Films saw its EBIT decline by 5.4% over the last year. That sort of decline, if sustained, will obviously make debt harder to handle. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Essen Speciality Films will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Essen Speciality Films 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, Essen Speciality Films actually recorded a cash outflow, overall. Debt is far more risky for companies with unreliable free cash flow, so shareholders should be hoping that the past expenditure will produce free cash flow in the future.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Essen Speciality Films has net cash of ₹78.3m, as well as more liquid assets than liabilities. So we are not troubled with Essen Speciality Films's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Be aware that Essen Speciality Films is showing 4 warning signs in our investment analysis , and 1 of those is a bit concerning...

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.