We Think TTK Prestige (NSE:TTKPRESTIG) Can Manage Its Debt With Ease

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. We can see that TTK Prestige Limited (NSE:TTKPRESTIG) does use debt in its business. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for TTK Prestige

What Is TTK Prestige's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2021 TTK Prestige had ₹399.5m of debt, an increase on ₹378.9m, over one year. But it also has ₹5.72b in cash to offset that, meaning it has ₹5.32b net cash.

A Look At TTK Prestige's Liabilities

Zooming in on the latest balance sheet data, we can see that TTK Prestige had liabilities of ₹5.36b due within 12 months and liabilities of ₹814.9m due beyond that. On the other hand, it had cash of ₹5.72b and ₹4.37b worth of receivables due within a year. So it can boast ₹3.92b more liquid assets than total liabilities.

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

Even more impressive was the fact that TTK Prestige grew its EBIT by 113% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. 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 TTK Prestige can strengthen its balance sheet over time. 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. TTK Prestige 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. During the last three years, TTK Prestige produced sturdy free cash flow equating to 59% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing up

While it is always sensible to investigate a company's debt, in this case TTK Prestige has ₹5.32b in net cash and a decent-looking balance sheet. And we liked the look of last year's 113% year-on-year EBIT growth. So is TTK Prestige's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for TTK Prestige that you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.