These 4 Measures Indicate That Sarda Energy & Minerals (NSE:SARDAEN) Is Using Debt Reasonably Well

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We can see that Sarda Energy & Minerals Limited (NSE:SARDAEN) does use debt in its business. But the real question is whether this debt is making the company risky.

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Sarda Energy & Minerals

What Is Sarda Energy & Minerals's Net Debt?

The image below, which you can click on for greater detail, shows that Sarda Energy & Minerals had debt of ₹13.7b at the end of March 2024, a reduction from ₹14.3b over a year. On the flip side, it has ₹13.3b in cash leading to net debt of about ₹405.8m.

A Look At Sarda Energy & Minerals' Liabilities

We can see from the most recent balance sheet that Sarda Energy & Minerals had liabilities of ₹7.80b falling due within a year, and liabilities of ₹12.3b due beyond that. Offsetting these obligations, it had cash of ₹13.3b as well as receivables valued at ₹5.89b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹932.9m.

This state of affairs indicates that Sarda Energy & Minerals' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the ₹91.5b company is struggling for cash, we still think it's worth monitoring its balance sheet. But either way, Sarda Energy & Minerals has virtually no net debt, so it's fair to say it does not have a heavy debt load!

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). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

With net debt at just 0.052 times EBITDA, it seems Sarda Energy & Minerals only uses a little bit of leverage. Although with EBIT only covering interest expenses 4.7 times over, the company is truly paying for borrowing. Importantly, Sarda Energy & Minerals's EBIT fell a jaw-dropping 31% in the last twelve months. If that earnings trend continues then paying off its debt will be about as easy as herding cats on to a roller coaster. There's no doubt that we learn most about debt from the balance sheet. But it is Sarda Energy & Minerals's earnings that will influence how the balance sheet holds up in the future. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So we clearly need to look at whether that EBIT is leading to corresponding free cash flow. Over the most recent three years, Sarda Energy & Minerals recorded free cash flow worth 60% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Our View

Sarda Energy & Minerals's EBIT growth rate was a real negative on this analysis, although the other factors we considered were considerably better. There's no doubt that its ability to handle its debt, based on its EBITDA, is pretty flash. When we consider all the elements mentioned above, it seems to us that Sarda Energy & Minerals is managing its debt quite well. Having said that, the load is sufficiently heavy that we would recommend any shareholders keep a close eye on it. 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 1 warning sign with Sarda Energy & Minerals , 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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