Supreme Industries (NSE:SUPREMEIND) Has A Rock Solid Balance Sheet

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 Supreme Industries Limited (NSE:SUPREMEIND) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Supreme Industries

How Much Debt Does Supreme Industries Carry?

As you can see below, at the end of March 2024, Supreme Industries had ₹550.6m of debt, up from ₹511.7m a year ago. Click the image for more detail. However, its balance sheet shows it holds ₹11.8b in cash, so it actually has ₹11.2b net cash.

How Healthy Is Supreme Industries' Balance Sheet?

The latest balance sheet data shows that Supreme Industries had liabilities of ₹12.7b due within a year, and liabilities of ₹1.74b falling due after that. Offsetting these obligations, it had cash of ₹11.8b as well as receivables valued at ₹6.15b due within 12 months. So it can boast ₹3.46b more liquid assets than total liabilities.

Having regard to Supreme Industries' size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the ₹664.5b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Supreme Industries boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Supreme Industries grew its EBIT by 32% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Supreme Industries can strengthen its balance sheet over time. 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 company can only pay off debt with cold hard cash, not accounting profits. 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 44% 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 Supreme Industries has ₹11.2b in net cash and a decent-looking balance sheet. And we liked the look of last year's 32% year-on-year EBIT growth. So is Supreme Industries's debt a risk? It doesn't seem so to us. 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.

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.