We Think Deepak Nitrite (NSE:DEEPAKNTR) Can Manage Its Debt With Ease

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. Importantly, Deepak Nitrite Limited (NSE:DEEPAKNTR) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Deepak Nitrite

How Much Debt Does Deepak Nitrite Carry?

You can click the graphic below for the historical numbers, but it shows that Deepak Nitrite had ₹3.94b of debt in September 2021, down from ₹6.83b, one year before. However, it also had ₹2.97b in cash, and so its net debt is ₹972.2m.

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 ₹5.89b due within 12 months and liabilities of ₹4.61b due beyond that. On the other hand, it had cash of ₹2.97b and ₹8.93b worth of receivables due within a year. So it actually has ₹1.40b 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 ₹320.9b company is short on cash, but still worth keeping an eye on the balance sheet. But either way, Deepak Nitrite has virtually no net debt, so it's fair to say it does not have a heavy debt load!

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Deepak Nitrite has very little debt (net of cash), and boasts a debt to EBITDA ratio of 0.06 and EBIT of 31.1 times the interest expense. Indeed relative to its earnings its debt load seems light as a feather. On top of that, Deepak Nitrite grew its EBIT by 71% over the last twelve months, and that growth will make it easier to handle its 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. In the last three years, Deepak Nitrite's free cash flow amounted to 47% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Our View

The good news is that Deepak Nitrite's demonstrated ability to cover its interest expense with its EBIT delights us like a fluffy puppy does a toddler. And that's just the beginning of the good news since its EBIT growth rate is also very heartening. Zooming out, Deepak Nitrite seems to use debt quite reasonably; and that gets the nod from us. While debt does bring risk, when used wisely it can also bring a higher return on equity. 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 you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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