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.' 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 can see that Deepak Nitrite Limited (NSE:DEEPAKNTR) does use debt in its business. But should shareholders be worried about its use of debt?
When Is Debt Dangerous?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, plenty of companies use debt to fund growth, without any negative consequences. 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 ₹728.6m at the end of March 2023, a reduction from ₹3.15b over a year. But on the other hand it also has ₹4.15b in cash, leading to a ₹3.42b net cash position.
How Strong Is Deepak Nitrite's Balance Sheet?
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. On the other hand, it had cash of ₹4.15b and ₹13.5b worth of receivables due within a year. So it actually has ₹7.23b 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!
The modesty of its debt load may become crucial for Deepak Nitrite if management cannot prevent a repeat of the 26% cut to EBIT over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. 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 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 43% of its EBIT, which is weaker 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 ₹3.42b in net cash and a decent-looking balance sheet. So we are not troubled with Deepak Nitrite's debt use. Of course, we wouldn't say no to the extra confidence that we'd gain if we knew that Deepak Nitrite insiders have been buying shares: if you're on the same wavelength, you can find out if insiders are buying by clicking this link.
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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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.
About NSEI:DEEPAKNTR
Deepak Nitrite
Manufactures, trades and sells chemical intermediates in India and internationally.
Flawless balance sheet with solid track record and pays a dividend.