These 4 Measures Indicate That Adani Wilmar (NSE:AWL) Is Using Debt Reasonably Well

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 Adani Wilmar Limited (NSE:AWL) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. 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 think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Adani Wilmar

What Is Adani Wilmar's Debt?

You can click the graphic below for the historical numbers, but it shows that Adani Wilmar had ₹19.4b of debt in September 2024, down from ₹36.4b, one year before. But it also has ₹33.0b in cash to offset that, meaning it has ₹13.6b net cash.

How Strong Is Adani Wilmar's Balance Sheet?

The latest balance sheet data shows that Adani Wilmar had liabilities of ₹117.5b due within a year, and liabilities of ₹11.8b falling due after that. Offsetting these obligations, it had cash of ₹33.0b as well as receivables valued at ₹22.7b due within 12 months. So its liabilities total ₹73.6b more than the combination of its cash and short-term receivables.

Since publicly traded Adani Wilmar shares are worth a total of ₹410.5b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Adani Wilmar boasts net cash, so it's fair to say it does not have a heavy debt load!

It is well worth noting that Adani Wilmar's EBIT shot up like bamboo after rain, gaining 61% in the last twelve months. That'll make it easier to manage its 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 Adani Wilmar 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Adani Wilmar 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, Adani Wilmar created free cash flow amounting to 8.5% of its EBIT, an uninspiring performance. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing Up

While Adani Wilmar does have more liabilities than liquid assets, it also has net cash of ₹13.6b. And we liked the look of last year's 61% year-on-year EBIT growth. So we don't have any problem with Adani Wilmar's use of debt. Over time, share prices tend to follow earnings per share, so if you're interested in Adani Wilmar, you may well want to click here to check an interactive graph of its earnings per share history.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.