Is Aspinwall (NSE:ASPINWALL) 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 Aspinwall and Company Limited (NSE:ASPINWALL) does use debt in its business. But should shareholders be worried about its use of debt?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Aspinwall

How Much Debt Does Aspinwall Carry?

The image below, which you can click on for greater detail, shows that at March 2024 Aspinwall had debt of ₹207.5m, up from ₹139.9m in one year. But it also has ₹360.5m in cash to offset that, meaning it has ₹153.0m net cash.

How Healthy Is Aspinwall's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Aspinwall had liabilities of ₹615.2m due within 12 months and liabilities of ₹57.0m due beyond that. Offsetting these obligations, it had cash of ₹360.5m as well as receivables valued at ₹325.6m due within 12 months. So it can boast ₹13.9m more liquid assets than total liabilities.

Having regard to Aspinwall's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the ₹2.31b company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that Aspinwall has more cash than debt is arguably a good indication that it can manage its debt safely.

In fact Aspinwall's saving grace is its low debt levels, because its EBIT has tanked 78% in the last twelve months. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Aspinwall's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Aspinwall has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, Aspinwall generated free cash flow amounting to a very robust 87% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Aspinwall has net cash of ₹153.0m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of -₹79m, being 87% of its EBIT. So we don't have any problem with Aspinwall's use of debt. 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. We've identified 4 warning signs with Aspinwall , and understanding them should be part of your investment process.

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