Is Eureka Forbes (NSE:EUREKAFORB) 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. We note that Eureka Forbes Limited (NSE:EUREKAFORB) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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 Eureka Forbes

What Is Eureka Forbes's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Eureka Forbes had ₹503.5m of debt in September 2024, down from ₹645.9m, one year before. But on the other hand it also has ₹2.03b in cash, leading to a ₹1.52b net cash position.

How Healthy Is Eureka Forbes' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Eureka Forbes had liabilities of ₹10.7b due within 12 months and liabilities of ₹9.46b due beyond that. Offsetting this, it had ₹2.03b in cash and ₹2.03b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹16.1b.

Given Eureka Forbes has a market capitalization of ₹116.4b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Eureka Forbes also has more cash than debt, so we're pretty confident it can manage its debt safely.

Also positive, Eureka Forbes grew its EBIT by 21% in the last year, and that should make it easier to pay down debt, going forward. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Eureka Forbes'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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Eureka Forbes 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. Happily for any shareholders, Eureka Forbes actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While Eureka Forbes does have more liabilities than liquid assets, it also has net cash of ₹1.52b. And it impressed us with free cash flow of ₹1.3b, being 112% of its EBIT. So is Eureka Forbes's debt a risk? It doesn't seem so to us. 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 Eureka Forbes'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.

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.