Here's Why Avanti Feeds (NSE:AVANTIFEED) Can Manage Its Debt Responsibly

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.' 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 note that Avanti Feeds Limited (NSE:AVANTIFEED) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. 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, 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.

View our latest analysis for Avanti Feeds

What Is Avanti Feeds's Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Avanti Feeds had ₹139.4m of debt, an increase on none, over one year. But on the other hand it also has ₹14.4b in cash, leading to a ₹14.3b net cash position.

A Look At Avanti Feeds' Liabilities

The latest balance sheet data shows that Avanti Feeds had liabilities of ₹3.50b due within a year, and liabilities of ₹584.2m falling due after that. Offsetting this, it had ₹14.4b in cash and ₹1.45b in receivables that were due within 12 months. So it actually has ₹11.8b more liquid assets than total liabilities.

This surplus suggests that Avanti Feeds has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Avanti Feeds boasts net cash, so it's fair to say it does not have a heavy debt load!

Also good is that Avanti Feeds grew its EBIT at 15% over the last year, further increasing its ability to manage debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Avanti Feeds's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Avanti Feeds 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, Avanti Feeds 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 Avanti Feeds has net cash of ₹14.3b, as well as more liquid assets than liabilities. On top of that, it increased its EBIT by 15% in the last twelve months. So we don't think Avanti Feeds's use of debt is risky. 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. For example, we've discovered 1 warning sign for Avanti Feeds that you should be aware of before investing here.

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.