Is Triveni Engineering & Industries (NSE:TRIVENI) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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, Triveni Engineering & Industries Limited (NSE:TRIVENI) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Triveni Engineering & Industries

What Is Triveni Engineering & Industries's Debt?

As you can see below, at the end of September 2022, Triveni Engineering & Industries had ₹8.64b of debt, up from ₹5.70b a year ago. Click the image for more detail. However, its balance sheet shows it holds ₹17.7b in cash, so it actually has ₹9.08b net cash.

A Look At Triveni Engineering & Industries' Liabilities

We can see from the most recent balance sheet that Triveni Engineering & Industries had liabilities of ₹10.5b falling due within a year, and liabilities of ₹4.66b due beyond that. Offsetting these obligations, it had cash of ₹17.7b as well as receivables valued at ₹2.20b due within 12 months. So it can boast ₹4.75b more liquid assets than total liabilities.

This short term liquidity is a sign that Triveni Engineering & Industries could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Triveni Engineering & Industries has more cash than debt is arguably a good indication that it can manage its debt safely.

But the bad news is that Triveni Engineering & Industries has seen its EBIT plunge 12% in the last twelve months. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. 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 Triveni Engineering & Industries'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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Triveni Engineering & Industries 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. Over the last three years, Triveni Engineering & Industries actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While it is always sensible to investigate a company's debt, in this case Triveni Engineering & Industries has ₹9.08b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of -₹547m, being 102% of its EBIT. So we are not troubled with Triveni Engineering & Industries's debt use. 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. To that end, you should learn about the 4 warning signs we've spotted with Triveni Engineering & Industries (including 2 which are concerning) .

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.