Here's Why Chaman Lal Setia Exports (NSE:CLSEL) 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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Chaman Lal Setia Exports Ltd. (NSE:CLSEL) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. 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 Chaman Lal Setia Exports

What Is Chaman Lal Setia Exports's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Chaman Lal Setia Exports had ₹475.5m of debt in September 2024, down from ₹587.5m, one year before. However, its balance sheet shows it holds ₹2.01b in cash, so it actually has ₹1.53b net cash.

How Strong Is Chaman Lal Setia Exports' Balance Sheet?

According to the last reported balance sheet, Chaman Lal Setia Exports had liabilities of ₹1.52b due within 12 months, and liabilities of ₹464.2m due beyond 12 months. Offsetting these obligations, it had cash of ₹2.01b as well as receivables valued at ₹2.48b due within 12 months. So it can boast ₹2.50b more liquid assets than total liabilities.

This surplus suggests that Chaman Lal Setia Exports is using debt in a way that is appears to be both safe and conservative. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, Chaman Lal Setia Exports boasts net cash, so it's fair to say it does not have a heavy debt load!

In fact Chaman Lal Setia Exports's saving grace is its low debt levels, because its EBIT has tanked 23% in the last twelve months. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Chaman Lal Setia Exports will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Chaman Lal Setia Exports 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. During the last three years, Chaman Lal Setia Exports burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Chaman Lal Setia Exports has net cash of ₹1.53b, as well as more liquid assets than liabilities. So we don't have any problem with Chaman Lal Setia Exports'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. For instance, we've identified 2 warning signs for Chaman Lal Setia Exports that you should be aware of.

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.