Is Deepak Nitrite (NSE:DEEPAKNTR) Using Too Much Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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 can see that Deepak Nitrite Limited (NSE:DEEPAKNTR) does use debt in its business. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Deepak Nitrite

What Is Deepak Nitrite's Debt?

As you can see below, Deepak Nitrite had ₹3.15b of debt at March 2022, down from ₹5.90b a year prior. However, its balance sheet shows it holds ₹4.79b in cash, so it actually has ₹1.64b net cash.

How Strong Is Deepak Nitrite's Balance Sheet?

The latest balance sheet data shows that Deepak Nitrite had liabilities of ₹7.47b due within a year, and liabilities of ₹3.45b falling due after that. Offsetting this, it had ₹4.79b in cash and ₹11.3b in receivables that were due within 12 months. So it can boast ₹5.17b more liquid assets than total liabilities.

This state of affairs indicates that Deepak Nitrite's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the ₹278.8b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Deepak Nitrite boasts net cash, so it's fair to say it does not have a heavy debt load!

Deepak Nitrite's EBIT was pretty flat over the last year, but that shouldn't be an issue given the it doesn't have a lot of debt. When analysing debt levels, the balance sheet is the obvious place to start. 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. Over the most recent three years, Deepak Nitrite recorded free cash flow worth 53% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Deepak Nitrite has net cash of ₹1.64b, as well as more liquid assets than liabilities. So we don't have any problem with Deepak Nitrite's use of debt. 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.

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.