Is Shreyans Industries (NSE:SHREYANIND) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies Shreyans Industries Limited (NSE:SHREYANIND) makes use of debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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.

See our latest analysis for Shreyans Industries

What Is Shreyans Industries's Debt?

You can click the graphic below for the historical numbers, but it shows that Shreyans Industries had ₹406.3m of debt in March 2023, down from ₹596.0m, one year before. However, its balance sheet shows it holds ₹1.60b in cash, so it actually has ₹1.19b net cash.

How Strong Is Shreyans Industries' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Shreyans Industries had liabilities of ₹1.37b due within 12 months and liabilities of ₹430.9m due beyond that. On the other hand, it had cash of ₹1.60b and ₹372.2m worth of receivables due within a year. So it can boast ₹168.2m more liquid assets than total liabilities.

This surplus suggests that Shreyans Industries has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Shreyans Industries boasts net cash, so it's fair to say it does not have a heavy debt load!

Although Shreyans Industries made a loss at the EBIT level, last year, it was also good to see that it generated ₹971m in EBIT over the last twelve months. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Shreyans Industries will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Shreyans Industries may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last year, Shreyans Industries generated free cash flow amounting to a very robust 86% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Shreyans Industries has net cash of ₹1.19b, as well as more liquid assets than liabilities. The cherry on top was that in converted 86% of that EBIT to free cash flow, bringing in ₹837m. So is Shreyans Industries's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 4 warning signs we've spotted with Shreyans Industries (including 1 which 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.