These 4 Measures Indicate That Shalby (NSE:SHALBY) Is Using Debt Reasonably Well

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. We note that Shalby Limited (NSE:SHALBY) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Shalby

What Is Shalby's Debt?

The chart below, which you can click on for greater detail, shows that Shalby had ₹1.24b in debt in September 2023; about the same as the year before. However, it does have ₹1.98b in cash offsetting this, leading to net cash of ₹740.3m.

A Look At Shalby's Liabilities

According to the last reported balance sheet, Shalby had liabilities of ₹1.93b due within 12 months, and liabilities of ₹1.59b due beyond 12 months. Offsetting these obligations, it had cash of ₹1.98b as well as receivables valued at ₹1.39b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹146.9m.

Having regard to Shalby's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the ₹31.5b company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, Shalby also has more cash than debt, so we're pretty confident it can manage its debt safely.

Also positive, Shalby grew its EBIT by 30% in the last year, and that should make it easier to pay down debt, going forward. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Shalby'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Shalby 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, Shalby created free cash flow amounting to 16% of its EBIT, an uninspiring performance. That limp level of cash conversion undermines its ability to manage and pay down debt.

Summing Up

We could understand if investors are concerned about Shalby's liabilities, but we can be reassured by the fact it has has net cash of ₹740.3m. And it impressed us with its EBIT growth of 30% over the last year. So is Shalby's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Shalby 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.