Is Safari Industries (India) (NSE:SAFARI) Using Too Much Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. We can see that Safari Industries (India) Limited (NSE:SAFARI) does use debt in its business. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Safari Industries (India)

What Is Safari Industries (India)'s Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Safari Industries (India) had debt of ₹550.8m, up from ₹344.9m in one year. However, it does have ₹3.03b in cash offsetting this, leading to net cash of ₹2.48b.

A Look At Safari Industries (India)'s Liabilities

According to the last reported balance sheet, Safari Industries (India) had liabilities of ₹3.06b due within 12 months, and liabilities of ₹861.2m due beyond 12 months. Offsetting these obligations, it had cash of ₹3.03b as well as receivables valued at ₹3.47b due within 12 months. So it can boast ₹2.58b 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.

On the other hand, Safari Industries (India) saw its EBIT drop by 9.7% in the last twelve months. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. 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. Over the last three years, Safari Industries (India) reported free cash flow worth 15% of its EBIT, which is really quite low. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Safari Industries (India) has net cash of ₹2.48b, as well as more liquid assets than liabilities. So we don't have any problem with Safari Industries (India)'s use of debt. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Safari Industries (India) (of which 1 makes us a bit uncomfortable!) you should know about.

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.