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

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.' 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. As with many other companies Deepak Nitrite Limited (NSE:DEEPAKNTR) makes use of debt. 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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, 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 September 2024 Deepak Nitrite had debt of ₹7.91b, up from ₹527.1m in one year. However, its balance sheet shows it holds ₹8.52b in cash, so it actually has ₹609.1m net cash.

How Healthy Is Deepak Nitrite's Balance Sheet?

According to the last reported balance sheet, Deepak Nitrite had liabilities of ₹8.39b due within 12 months, and liabilities of ₹10.5b due beyond 12 months. Offsetting this, it had ₹8.52b in cash and ₹12.5b in receivables that were due within 12 months. So it actually has ₹2.22b 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 ₹350.7b 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.

The good news is that Deepak Nitrite has increased its EBIT by 2.8% over twelve months, which should ease any concerns about debt repayment. 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'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. 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 last three years, Deepak Nitrite reported free cash flow worth 16% of its EBIT, which is really quite low. That limp level of cash conversion undermines its ability to manage and pay down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Deepak Nitrite has ₹609.1m in net cash and a decent-looking balance sheet. And it also grew its EBIT by 2.8% over the last year. So we don't have any problem with Deepak Nitrite's use of debt. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Deepak Nitrite (of which 1 is significant!) you should know about.

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.