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.' 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. We note that Deepak Nitrite Limited (NSE:DEEPAKNTR) does have debt on its balance sheet. But is this debt a concern to shareholders?

AI is about to change healthcare. These 20 stocks are working on everything from early diagnostics to drug discovery. The best part - they are all under $10bn in marketcap - there is still time to get in early.

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own 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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Deepak Nitrite's Net Debt?

As you can see below, at the end of March 2025, Deepak Nitrite had ₹11.7b of debt, up from ₹2.17b a year ago. Click the image for more detail. On the flip side, it has ₹9.14b in cash leading to net debt of about ₹2.56b.

A Look At Deepak Nitrite's Liabilities

According to the last reported balance sheet, Deepak Nitrite had liabilities of ₹9.23b due within 12 months, and liabilities of ₹13.7b due beyond 12 months. On the other hand, it had cash of ₹9.14b and ₹12.8b worth of receivables due within a year. So it has liabilities totalling ₹1.03b more than its cash and near-term receivables, combined.

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 ₹257.9b company is short on cash, but still worth keeping an eye on the balance sheet. Carrying virtually no net debt, Deepak Nitrite has a very light debt load indeed.

View our latest analysis for Deepak Nitrite

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Deepak Nitrite has a low net debt to EBITDA ratio of only 0.23. And its EBIT easily covers its interest expense, being 32.6 times the size. So we're pretty relaxed about its super-conservative use of debt. But the other side of the story is that Deepak Nitrite saw its EBIT decline by 9.4% over the last year. That sort of decline, if sustained, will obviously make debt harder to handle. When analysing debt levels, the balance sheet is the obvious place to start. 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So we always check how much of that EBIT is translated into free cash flow. Considering the last three years, Deepak Nitrite actually recorded a cash outflow, overall. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.

Our View

Both Deepak Nitrite's ability to to cover its interest expense with its EBIT and its net debt to EBITDA gave us comfort that it can handle its debt. But truth be told its conversion of EBIT to free cash flow had us nibbling our nails. Looking at all this data makes us feel a little cautious about Deepak Nitrite's debt levels. While debt does have its upside in higher potential returns, we think shareholders should definitely consider how debt levels might make the stock more risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 2 warning signs for Deepak Nitrite you should be aware of, and 1 of them is a bit unpleasant.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.