Here's Why Supreme Industries (NSE:SUPREMEIND) Can Manage Its Debt Responsibly

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 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 note that The Supreme Industries Limited (NSE:SUPREMEIND) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. 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 Supreme Industries

What Is Supreme Industries's Net Debt?

As you can see below, at the end of March 2023, Supreme Industries had ₹511.7m of debt, up from ₹456.8m a year ago. Click the image for more detail. But it also has ₹7.38b in cash to offset that, meaning it has ₹6.87b net cash.

How Strong Is Supreme Industries' Balance Sheet?

We can see from the most recent balance sheet that Supreme Industries had liabilities of ₹11.4b falling due within a year, and liabilities of ₹1.56b due beyond that. On the other hand, it had cash of ₹7.38b and ₹6.07b worth of receivables due within a year. So it can boast ₹529.8m more liquid assets than total liabilities.

This state of affairs indicates that Supreme Industries' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the ₹553.1b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, Supreme Industries boasts net cash, so it's fair to say it does not have a heavy debt load!

But the other side of the story is that Supreme Industries saw its EBIT decline by 6.8% over the last year. That sort of decline, if sustained, will obviously make debt harder to handle. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Supreme Industries's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Supreme 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, Supreme Industries recorded free cash flow of 41% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Supreme Industries has net cash of ₹6.87b, as well as more liquid assets than liabilities. So we don't have any problem with Supreme Industries's use of debt. Over time, share prices tend to follow earnings per share, so if you're interested in Supreme Industries, you may well want to click here to check an interactive graph of its earnings per share history.

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.