Does Deepak Nitrite (NSE:DEEPAKNTR) Have A 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.' 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. As with many other companies Deepak Nitrite Limited (NSE:DEEPAKNTR) makes use of debt. But is this debt a concern to shareholders?

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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See 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 ₹544.8m at the end of March 2023, a reduction from ₹3.01b over a year. However, it does have ₹4.17b in cash offsetting this, leading to net cash of ₹3.62b.

A Look At Deepak Nitrite's Liabilities

Zooming in on the latest balance sheet data, we can see that Deepak Nitrite had liabilities of ₹7.94b due within 12 months and liabilities of ₹2.45b due beyond that. Offsetting this, it had ₹4.17b in cash and ₹13.1b in receivables that were due within 12 months. So it actually has ₹6.88b 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.

It is just as well that Deepak Nitrite's load is not too heavy, because its EBIT was down 22% over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Deepak Nitrite'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 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 47% 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 Deepak Nitrite has ₹3.62b in net cash and a decent-looking balance sheet. So we are not troubled with Deepak Nitrite's debt use. 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. Case in point: We've spotted 1 warning sign for Deepak Nitrite you should be aware of.

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.