Lloyds Metals and Energy (NSE:LLOYDSME) Seems To Use Debt Quite Sensibly

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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Lloyds Metals and Energy Limited (NSE:LLOYDSME) does have debt on its balance sheet. But is this debt a concern to shareholders?

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When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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.

What Is Lloyds Metals and Energy's Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2025 Lloyds Metals and Energy had ₹10.0b of debt, an increase on ₹1.62b, over one year. However, it also had ₹6.10b in cash, and so its net debt is ₹3.94b.

How Strong Is Lloyds Metals and Energy's Balance Sheet?

We can see from the most recent balance sheet that Lloyds Metals and Energy had liabilities of ₹21.1b falling due within a year, and liabilities of ₹9.01b due beyond that. Offsetting these obligations, it had cash of ₹6.10b as well as receivables valued at ₹16.1b due within 12 months. So its liabilities total ₹7.97b more than the combination of its cash and short-term receivables.

Having regard to Lloyds Metals and Energy's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the ₹688.0b company is struggling for cash, we still think it's worth monitoring its balance sheet. Carrying virtually no net debt, Lloyds Metals and Energy has a very light debt load indeed.

Check out our latest analysis for Lloyds Metals and Energy

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). 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).

Lloyds Metals and Energy has net debt of just 0.20 times EBITDA, suggesting it could ramp leverage without breaking a sweat. But the really cool thing is that it actually managed to receive more interest than it paid, over the last year. So there's no doubt this company can take on debt while staying cool as a cucumber. Fortunately, Lloyds Metals and Energy grew its EBIT by 4.7% in the last year, making that debt load look even more manageable. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Lloyds Metals and Energy'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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. So it's worth checking how much of that EBIT is backed by free cash flow. Over the last three years, Lloyds Metals and Energy saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Our View

Based on what we've seen Lloyds Metals and Energy is not finding it easy, given its conversion of EBIT to free cash flow, but the other factors we considered give us cause to be optimistic. In particular, we are dazzled with its interest cover. When we consider all the elements mentioned above, it seems to us that Lloyds Metals and Energy is managing its debt quite well. But a word of caution: we think debt levels are high enough to justify ongoing monitoring. We'd be motivated to research the stock further if we found out that Lloyds Metals and Energy insiders have bought shares recently. If you would too, then you're in luck, since today we're sharing our list of reported insider transactions for free.

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.