Indian Metals and Ferro Alloys (NSE:IMFA) Seems To Use Debt Rather Sparingly

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.' 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. We note that Indian Metals and Ferro Alloys Limited (NSE:IMFA) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Indian Metals and Ferro Alloys

What Is Indian Metals and Ferro Alloys's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Indian Metals and Ferro Alloys had ₹2.80b of debt in September 2024, down from ₹3.57b, one year before. But it also has ₹8.14b in cash to offset that, meaning it has ₹5.33b net cash.

How Strong Is Indian Metals and Ferro Alloys' Balance Sheet?

According to the last reported balance sheet, Indian Metals and Ferro Alloys had liabilities of ₹6.34b due within 12 months, and liabilities of ₹639.8m due beyond 12 months. Offsetting these obligations, it had cash of ₹8.14b as well as receivables valued at ₹2.25b due within 12 months. So it actually has ₹3.41b more liquid assets than total liabilities.

This surplus suggests that Indian Metals and Ferro Alloys has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Indian Metals and Ferro Alloys boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Indian Metals and Ferro Alloys grew its EBIT by 38% 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 it is Indian Metals and Ferro Alloys's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Indian Metals and Ferro Alloys 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. During the last three years, Indian Metals and Ferro Alloys produced sturdy free cash flow equating to 65% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Indian Metals and Ferro Alloys has net cash of ₹5.33b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 38% over the last year. So is Indian Metals and Ferro Alloys's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. 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 1 warning sign for Indian Metals and Ferro Alloys you should know about.

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.

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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.