These 4 Measures Indicate That Sandur Manganese & Iron Ores (NSE:SANDUMA) Is Using Debt Safely

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.' 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. Importantly, The Sandur Manganese & Iron Ores Limited (NSE:SANDUMA) does carry debt. But the real question is whether this debt is making the company risky.

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. If things get really bad, the lenders can take control of the business. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Sandur Manganese & Iron Ores

How Much Debt Does Sandur Manganese & Iron Ores Carry?

As you can see below, at the end of September 2024, Sandur Manganese & Iron Ores had ₹2.75b of debt, up from ₹1.47b a year ago. Click the image for more detail. However, its balance sheet shows it holds ₹11.5b in cash, so it actually has ₹8.73b net cash.

A Look At Sandur Manganese & Iron Ores' Liabilities

According to the last reported balance sheet, Sandur Manganese & Iron Ores had liabilities of ₹4.21b due within 12 months, and liabilities of ₹2.34b due beyond 12 months. On the other hand, it had cash of ₹11.5b and ₹2.66b worth of receivables due within a year. So it actually has ₹7.59b more liquid assets than total liabilities.

This short term liquidity is a sign that Sandur Manganese & Iron Ores could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Sandur Manganese & Iron Ores boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Sandur Manganese & Iron Ores has boosted its EBIT by 85%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But it is Sandur Manganese & Iron Ores'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 company can only pay off debt with cold hard cash, not accounting profits. While Sandur Manganese & Iron Ores 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. Looking at the most recent three years, Sandur Manganese & Iron Ores recorded free cash flow of 42% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Sandur Manganese & Iron Ores has ₹8.73b in net cash and a decent-looking balance sheet. And we liked the look of last year's 85% year-on-year EBIT growth. So we don't think Sandur Manganese & Iron Ores's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Be aware that Sandur Manganese & Iron Ores is showing 1 warning sign in our investment analysis , you should know about...

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.