Does Safari Industries (India) (NSE:SAFARI) Have A Healthy Balance Sheet?

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.' 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. As with many other companies Safari Industries (India) Limited (NSE:SAFARI) makes use of debt. But is this debt a concern to shareholders?

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. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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 step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Safari Industries (India)

How Much Debt Does Safari Industries (India) Carry?

As you can see below, Safari Industries (India) had ₹415.7m of debt at March 2024, down from ₹601.0m a year prior. However, its balance sheet shows it holds ₹3.67b in cash, so it actually has ₹3.26b net cash.

How Strong Is Safari Industries (India)'s Balance Sheet?

We can see from the most recent balance sheet that Safari Industries (India) had liabilities of ₹2.31b falling due within a year, and liabilities of ₹895.8m due beyond that. On the other hand, it had cash of ₹3.67b and ₹1.65b worth of receivables due within a year. So it can boast ₹2.12b more liquid assets than total liabilities.

This short term liquidity is a sign that Safari Industries (India) could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Safari Industries (India) has more cash than debt is arguably a good indication that it can manage its debt safely.

In addition to that, we're happy to report that Safari Industries (India) has boosted its EBIT by 36%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Safari Industries (India)'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, a company can only pay off debt with cold hard cash, not accounting profits. Safari Industries (India) 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. In the last three years, Safari Industries (India) created free cash flow amounting to 18% of its EBIT, an uninspiring performance. That limp level of cash conversion undermines its ability to manage and pay down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Safari Industries (India) has ₹3.26b in net cash and a decent-looking balance sheet. And we liked the look of last year's 36% year-on-year EBIT growth. So we don't think Safari Industries (India)'s use of debt is risky. 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. For example, we've discovered 2 warning signs for Safari Industries (India) 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.

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