Deepak Nitrite (NSE:DEEPAKNTR) Has A Pretty Healthy Balance Sheet

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.' 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. We note that Deepak Nitrite Limited (NSE:DEEPAKNTR) does have debt on its balance sheet. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Deepak Nitrite

How Much Debt Does Deepak Nitrite Carry?

The image below, which you can click on for greater detail, shows that Deepak Nitrite had debt of ₹2.54b at the end of September 2022, a reduction from ₹3.94b over a year. But it also has ₹4.87b in cash to offset that, meaning it has ₹2.33b net cash.

How Healthy Is Deepak Nitrite's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Deepak Nitrite had liabilities of ₹7.56b due within 12 months and liabilities of ₹2.61b due beyond that. On the other hand, it had cash of ₹4.87b and ₹11.0b worth of receivables due within a year. So it actually has ₹5.66b more liquid assets than total liabilities.

This short term liquidity is a sign that Deepak Nitrite could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Deepak Nitrite boasts net cash, so it's fair to say it does not have a heavy debt load!

On the other hand, Deepak Nitrite's EBIT dived 15%, over the last year. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Deepak Nitrite can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Deepak Nitrite 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, Deepak Nitrite's free cash flow amounted to 50% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Deepak Nitrite has net cash of ₹2.33b, as well as more liquid assets than liabilities. So we don't have any problem with Deepak Nitrite's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 1 warning sign we've spotted with Deepak Nitrite .

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.