These 4 Measures Indicate That Nova Agritech (NSE:NOVAAGRI) Is Using Debt Reasonably Well

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 can see that Nova Agritech Limited (NSE:NOVAAGRI) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Nova Agritech

What Is Nova Agritech's Debt?

You can click the graphic below for the historical numbers, but it shows that Nova Agritech had ₹612.0m of debt in March 2024, down from ₹709.6m, one year before. However, its balance sheet shows it holds ₹854.6m in cash, so it actually has ₹242.6m net cash.

A Look At Nova Agritech's Liabilities

Zooming in on the latest balance sheet data, we can see that Nova Agritech had liabilities of ₹955.1m due within 12 months and liabilities of ₹93.7m due beyond that. On the other hand, it had cash of ₹854.6m and ₹1.23b worth of receivables due within a year. So it actually has ₹1.04b more liquid assets than total liabilities.

This short term liquidity is a sign that Nova Agritech could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Nova Agritech has more cash than debt is arguably a good indication that it can manage its debt safely.

One way Nova Agritech could vanquish its debt would be if it stops borrowing more but continues to grow EBIT at around 13%, as it did over the last year. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Nova Agritech will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Nova Agritech 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. In the last three years, Nova Agritech basically broke even on a free cash flow basis. Some might say that's a concern, when it comes considering how easily it would be for it to down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Nova Agritech has ₹242.6m in net cash and a decent-looking balance sheet. On top of that, it increased its EBIT by 13% in the last twelve months. So we don't have any problem with Nova Agritech's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 2 warning signs with Nova Agritech , and understanding them should be part of your investment process.

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.

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