Is Navin Fluorine International (NSE:NAVINFLUOR) Using Too Much Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Navin Fluorine International Limited (NSE:NAVINFLUOR) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. 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. 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.

View our latest analysis for Navin Fluorine International

What Is Navin Fluorine International's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2023 Navin Fluorine International had ₹8.49b of debt, an increase on ₹1.05b, over one year. However, it also had ₹659.2m in cash, and so its net debt is ₹7.83b.

How Strong Is Navin Fluorine International's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Navin Fluorine International had liabilities of ₹5.21b due within 12 months and liabilities of ₹8.23b due beyond that. Offsetting these obligations, it had cash of ₹659.2m as well as receivables valued at ₹5.62b due within 12 months. So it has liabilities totalling ₹7.17b more than its cash and near-term receivables, combined.

Since publicly traded Navin Fluorine International shares are worth a total of ₹231.7b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward.

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).

Navin Fluorine International has a low net debt to EBITDA ratio of only 1.4. And its EBIT covers its interest expense a whopping 17.7 times over. So you could argue it is no more threatened by its debt than an elephant is by a mouse. On top of that, Navin Fluorine International grew its EBIT by 52% 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 it is future earnings, more than anything, that will determine Navin Fluorine International'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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. During the last three years, Navin Fluorine International burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Our View

Navin Fluorine International'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 the stark truth is that we are concerned by its conversion of EBIT to free cash flow. All these things considered, it appears that Navin Fluorine International can comfortably handle its current debt levels. Of course, while this leverage can enhance returns on equity, it does bring more risk, so it's worth keeping an eye on this one. 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. Be aware that Navin Fluorine International is showing 2 warning signs in our investment analysis , and 1 of those makes us a bit uncomfortable...

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.