These 4 Measures Indicate That Everest Kanto Cylinder (NSE:EKC) 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. Importantly, Everest Kanto Cylinder Limited (NSE:EKC) does carry debt. But the more important question is: how much risk is that debt creating?

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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Everest Kanto Cylinder

What Is Everest Kanto Cylinder's Net Debt?

As you can see below, at the end of September 2024, Everest Kanto Cylinder had ₹1.40b of debt, up from ₹493.6m a year ago. Click the image for more detail. However, because it has a cash reserve of ₹1.31b, its net debt is less, at about ₹93.3m.

A Look At Everest Kanto Cylinder's Liabilities

We can see from the most recent balance sheet that Everest Kanto Cylinder had liabilities of ₹3.36b falling due within a year, and liabilities of ₹443.9m due beyond that. Offsetting these obligations, it had cash of ₹1.31b as well as receivables valued at ₹2.29b due within 12 months. So it has liabilities totalling ₹207.2m more than its cash and near-term receivables, combined.

This state of affairs indicates that Everest Kanto Cylinder's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the ₹21.8b company is short on cash, but still worth keeping an eye on the balance sheet. Carrying virtually no net debt, Everest Kanto Cylinder has a very light debt load indeed.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

Everest Kanto Cylinder has very little debt (net of cash), and boasts a debt to EBITDA ratio of 0.053 and EBIT of 26.8 times the interest expense. So relative to past earnings, the debt load seems trivial. On top of that, Everest Kanto Cylinder grew its EBIT by 40% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Everest Kanto Cylinder can strengthen its balance sheet over time. 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. In the last three years, Everest Kanto Cylinder created free cash flow amounting to 18% of its EBIT, an uninspiring performance. That limp level of cash conversion undermines its ability to manage and pay down debt.

Our View

Everest Kanto Cylinder's interest cover suggests it can handle its debt as easily as Cristiano Ronaldo could score a goal against an under 14's goalkeeper. But truth be told we feel its conversion of EBIT to free cash flow does undermine this impression a bit. Zooming out, Everest Kanto Cylinder seems to use debt quite reasonably; and that gets the nod from us. After all, sensible leverage can boost returns on equity. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 2 warning signs for Everest Kanto Cylinder that 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.