Here's Why Atul (NSE:ATUL) Can Manage Its Debt Responsibly

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Atul Ltd (NSE:ATUL) does carry debt. But is this debt a concern to shareholders?

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When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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.

What Is Atul's Debt?

As you can see below, Atul had ₹1.98b of debt at March 2025, down from ₹2.32b a year prior. But on the other hand it also has ₹8.81b in cash, leading to a ₹6.83b net cash position.

How Strong Is Atul's Balance Sheet?

We can see from the most recent balance sheet that Atul had liabilities of ₹8.84b falling due within a year, and liabilities of ₹4.55b due beyond that. On the other hand, it had cash of ₹8.81b and ₹11.3b worth of receivables due within a year. So it actually has ₹6.69b more liquid assets than total liabilities.

This surplus suggests that Atul has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Atul boasts net cash, so it's fair to say it does not have a heavy debt load!

See our latest analysis for Atul

On top of that, Atul grew its EBIT by 51% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Atul'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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Atul 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. In the last three years, Atul's free cash flow amounted to 20% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While it is always sensible to investigate a company's debt, in this case Atul has ₹6.83b in net cash and a decent-looking balance sheet. And we liked the look of last year's 51% year-on-year EBIT growth. So is Atul'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 1 warning sign for Atul you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.