Is Avenue Supermarts (NSE:DMART) A Risky Investment?

Warren Buffett famously said, '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. Importantly, Avenue Supermarts Limited (NSE:DMART) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Avenue Supermarts

What Is Avenue Supermarts's Debt?

The image below, which you can click on for greater detail, shows that Avenue Supermarts had debt of ₹6.30b at the end of September 2023, a reduction from ₹7.11b over a year. However, it does have ₹12.3b in cash offsetting this, leading to net cash of ₹6.02b.

A Look At Avenue Supermarts' Liabilities

We can see from the most recent balance sheet that Avenue Supermarts had liabilities of ₹16.1b falling due within a year, and liabilities of ₹5.43b due beyond that. Offsetting these obligations, it had cash of ₹12.3b as well as receivables valued at ₹1.19b due within 12 months. So its liabilities total ₹8.04b more than the combination of its cash and short-term receivables.

Having regard to Avenue Supermarts' size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the ₹2.40t company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Avenue Supermarts boasts net cash, so it's fair to say it does not have a heavy debt load!

Fortunately, Avenue Supermarts grew its EBIT by 8.6% in the last year, making that debt load look even more manageable. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Avenue Supermarts 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. Avenue Supermarts 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. Considering the last three years, Avenue Supermarts 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

We could understand if investors are concerned about Avenue Supermarts's liabilities, but we can be reassured by the fact it has has net cash of ₹6.02b. And it also grew its EBIT by 8.6% over the last year. So we are not troubled with Avenue Supermarts's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Avenue Supermarts has 1 warning sign we think 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.