Is Avenue Supermarts (NSE:DMART) 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.' 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. We note that Avenue Supermarts Limited (NSE:DMART) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

This technology could replace computers: discover the 20 stocks are working to make quantum computing a reality.

What Risk Does Debt Bring?

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. If things get really bad, the lenders can take control of the business. 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. When we think about a company's use of debt, we first look at cash and debt together.

What Is Avenue Supermarts's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2025 Avenue Supermarts had ₹8.20b of debt, an increase on ₹5.92b, over one year. On the flip side, it has ₹3.59b in cash leading to net debt of about ₹4.60b.

A Look At Avenue Supermarts' Liabilities

According to the last reported balance sheet, Avenue Supermarts had liabilities of ₹22.1b due within 12 months, and liabilities of ₹6.81b due beyond 12 months. Offsetting these obligations, it had cash of ₹3.59b as well as receivables valued at ₹1.54b due within 12 months. So it has liabilities totalling ₹23.8b more than its cash and near-term receivables, combined.

This state of affairs indicates that Avenue Supermarts' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the ₹2.62t company is struggling for cash, we still think it's worth monitoring its balance sheet. Carrying virtually no net debt, Avenue Supermarts has a very light debt load indeed.

View our latest analysis for Avenue Supermarts

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Avenue Supermarts has very little debt (net of cash), and boasts a debt to EBITDA ratio of 0.10 and EBIT of 44.2 times the interest expense. Indeed relative to its earnings its debt load seems light as a feather. The good news is that Avenue Supermarts has increased its EBIT by 3.6% over twelve months, which should ease any concerns about debt repayment. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Avenue Supermarts can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So we clearly need to look at whether that EBIT is leading to corresponding free cash flow. 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.

Our View

Both Avenue Supermarts's ability to to cover its interest expense with its EBIT and its net debt to EBITDA gave us comfort that it can handle its debt. But truth be told its conversion of EBIT to free cash flow had us nibbling our nails. Considering this range of data points, we think Avenue Supermarts is in a good position to manage its debt levels. Having said that, the load is sufficiently heavy that we would recommend any shareholders keep a close eye on it. We'd be motivated to research the stock further if we found out that Avenue Supermarts insiders have bought shares recently. If you would too, then you're in luck, since today we're sharing our list of reported insider transactions 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.