Is Shreyans Industries (NSE:SHREYANIND) Using Too Much Debt?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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 Shreyans Industries Limited (NSE:SHREYANIND) does use debt in its business. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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.

View our latest analysis for Shreyans Industries

What Is Shreyans Industries's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2022 Shreyans Industries had ₹584.7m of debt, an increase on ₹542.0m, over one year. But it also has ₹1.18b in cash to offset that, meaning it has ₹592.3m net cash.

How Healthy Is Shreyans Industries' Balance Sheet?

According to the last reported balance sheet, Shreyans Industries had liabilities of ₹1.43b due within 12 months, and liabilities of ₹526.1m due beyond 12 months. Offsetting this, it had ₹1.18b in cash and ₹383.0m in receivables that were due within 12 months. So it has liabilities totalling ₹396.8m more than its cash and near-term receivables, combined.

Shreyans Industries has a market capitalization of ₹1.84b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. While it does have liabilities worth noting, Shreyans Industries also has more cash than debt, so we're pretty confident it can manage its debt safely.

Better yet, Shreyans Industries grew its EBIT by 1,496% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. There's no doubt that we learn most about debt from the balance sheet. But it is Shreyans Industries'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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Shreyans Industries 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, Shreyans Industries recorded free cash flow of 37% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While Shreyans Industries does have more liabilities than liquid assets, it also has net cash of ₹592.3m. And we liked the look of last year's 1,496% year-on-year EBIT growth. So we don't have any problem with Shreyans Industries's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Be aware that Shreyans Industries is showing 4 warning signs in our investment analysis , and 1 of those is concerning...

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.