These 4 Measures Indicate That Deepak Nitrite (NSE:DEEPAKNTR) Is Using Debt Reasonably Well

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, Deepak Nitrite Limited (NSE:DEEPAKNTR) does carry debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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 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 Debt?

The image below, which you can click on for greater detail, shows that at March 2024 Deepak Nitrite had debt of ₹2.17b, up from ₹544.8m in one year. But on the other hand it also has ₹5.85b in cash, leading to a ₹3.68b 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 ₹7.85b due within 12 months and liabilities of ₹4.88b due beyond that. On the other hand, it had cash of ₹5.85b and ₹13.0b worth of receivables due within a year. So it can boast ₹6.11b 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 ₹320.7b company is short on cash, but still worth keeping an eye on the balance sheet. 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. 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.

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. In the last three years, Deepak Nitrite's free cash flow amounted to 29% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Deepak Nitrite has net cash of ₹3.68b, as well as more liquid assets than liabilities. So we are not troubled with Deepak Nitrite's debt use. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Deepak Nitrite has 1 warning sign we think you should be aware of.

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.

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