Deepak Nitrite (NSE:DEEPAKNTR) Has A Pretty Healthy 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.' 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. We note that Deepak Nitrite Limited (NSE:DEEPAKNTR) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Deepak Nitrite

What Is Deepak Nitrite's Debt?

You can click the graphic below for the historical numbers, but it shows that Deepak Nitrite had ₹527.1m of debt in September 2023, down from ₹2.54b, one year before. But on the other hand it also has ₹5.39b in cash, leading to a ₹4.86b net cash position.

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 ₹6.88b due within 12 months and liabilities of ₹2.38b due beyond that. Offsetting these obligations, it had cash of ₹5.39b as well as receivables valued at ₹12.1b due within 12 months. So it can boast ₹8.25b 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. Simply put, the fact that Deepak Nitrite has more cash than debt is arguably a good indication that it can manage its debt safely.

But the bad news is that Deepak Nitrite has seen its EBIT plunge 16% 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 ultimately the future profitability of the business will decide if Deepak Nitrite can strengthen its balance sheet over time. 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. Deepak Nitrite 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. Looking at the most recent three years, Deepak Nitrite recorded free cash flow of 41% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Deepak Nitrite has ₹4.86b in net cash and a decent-looking balance sheet. So we don't have any problem with Deepak Nitrite's use of debt. We'd be motivated to research the stock further if we found out that Deepak Nitrite insiders have bought shares recently. If you would too, then you're in luck, since today we're sharing our list of reported insider transactions for free.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.