Tilaknagar Industries (NSE:TI) Has A Rock Solid Balance Sheet

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. Importantly, Tilaknagar Industries Ltd. (NSE:TI) does carry debt. But the more important question is: how much risk is that debt creating?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Tilaknagar Industries

How Much Debt Does Tilaknagar Industries Carry?

The image below, which you can click on for greater detail, shows that Tilaknagar Industries had debt of ₹923.7m at the end of September 2024, a reduction from ₹1.88b over a year. However, it does have ₹1.15b in cash offsetting this, leading to net cash of ₹224.7m.

How Strong Is Tilaknagar Industries' Balance Sheet?

The latest balance sheet data shows that Tilaknagar Industries had liabilities of ₹3.14b due within a year, and liabilities of ₹1.06b falling due after that. Offsetting these obligations, it had cash of ₹1.15b as well as receivables valued at ₹4.45b due within 12 months. So it actually has ₹1.40b more liquid assets than total liabilities.

Having regard to Tilaknagar Industries' size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the ₹76.0b company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that Tilaknagar Industries has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, Tilaknagar Industries grew its EBIT by 35% over the last twelve months, and that growth will make it easier to handle its 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 Tilaknagar Industries's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Tilaknagar Industries 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 most recent three years, Tilaknagar Industries recorded free cash flow worth 65% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Tilaknagar Industries has net cash of ₹224.7m, as well as more liquid assets than liabilities. And we liked the look of last year's 35% year-on-year EBIT growth. So is Tilaknagar Industries's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Be aware that Tilaknagar Industries is showing 1 warning sign in our investment analysis , you should know about...

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.