Does Deepak Nitrite (NSE:DEEPAKNTR) Have A 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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Deepak Nitrite Limited (NSE:DEEPAKNTR) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Deepak Nitrite

What Is Deepak Nitrite's Net Debt?

As you can see below, Deepak Nitrite had ₹3.01b of debt at March 2022, down from ₹5.78b a year prior. However, it does have ₹4.79b in cash offsetting this, leading to net cash of ₹1.78b.

How Healthy Is Deepak Nitrite's Balance Sheet?

We can see from the most recent balance sheet that Deepak Nitrite had liabilities of ₹7.47b falling due within a year, and liabilities of ₹3.45b due beyond that. Offsetting these obligations, it had cash of ₹4.79b as well as receivables valued at ₹11.3b due within 12 months. So it can boast ₹5.16b more liquid assets than total liabilities.

Having regard to Deepak Nitrite's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the ₹264.8b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, Deepak Nitrite boasts net cash, so it's fair to say it does not have a heavy debt load!

Also positive, Deepak Nitrite grew its EBIT by 30% in the last year, and that should make it easier to pay down debt, going forward. 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'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. 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. During the last three years, Deepak Nitrite produced sturdy free cash flow equating to 52% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing up

While it is always sensible to investigate a company's debt, in this case Deepak Nitrite has ₹1.78b in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 30% over the last year. So we don't think Deepak Nitrite's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in Deepak Nitrite, you may well want to click here to check an interactive graph of its earnings per share history.

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.