We Think Avanti Feeds (NSE:AVANTIFEED) Can Manage Its Debt With Ease

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 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. As with many other companies Avanti Feeds Limited (NSE:AVANTIFEED) makes use of debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. 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. 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.

View our latest analysis for Avanti Feeds

What Is Avanti Feeds's Net Debt?

As you can see below, at the end of September 2024, Avanti Feeds had ₹139.4m of debt, up from ₹72.3m a year ago. Click the image for more detail. However, its balance sheet shows it holds ₹19.4b in cash, so it actually has ₹19.3b net cash.

How Strong Is Avanti Feeds' Balance Sheet?

According to the last reported balance sheet, Avanti Feeds had liabilities of ₹5.16b due within 12 months, and liabilities of ₹580.0m due beyond 12 months. On the other hand, it had cash of ₹19.4b and ₹1.85b worth of receivables due within a year. So it actually has ₹15.5b more liquid assets than total liabilities.

This excess liquidity suggests that Avanti Feeds is taking a careful approach to debt. Because it has plenty of assets, it is unlikely to have trouble with its lenders. 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 17% over the last year, further increasing its ability to manage debt. 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 Avanti Feeds 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Avanti Feeds 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. In the last three years, Avanti Feeds's free cash flow amounted to 43% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Avanti Feeds has ₹19.3b in net cash and a decent-looking balance sheet. And we liked the look of last year's 17% year-on-year EBIT growth. So we don't think Avanti Feeds's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Avanti Feeds has 1 warning sign we think you should be aware of.

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.