Affle (India) (NSE:AFFLE) Seems To Use Debt Rather Sparingly

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 Affle (India) Limited (NSE:AFFLE) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Affle (India)

How Much Debt Does Affle (India) Carry?

As you can see below, Affle (India) had ₹1.34b of debt at September 2022, down from ₹1.62b a year prior. But it also has ₹4.77b in cash to offset that, meaning it has ₹3.43b net cash.

How Strong Is Affle (India)'s Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Affle (India) had liabilities of ₹3.80b due within 12 months and liabilities of ₹1.65b due beyond that. Offsetting this, it had ₹4.77b in cash and ₹3.28b in receivables that were due within 12 months. So it actually has ₹2.60b more liquid assets than total liabilities.

This state of affairs indicates that Affle (India)'s 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 ₹145.5b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Affle (India) boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Affle (India) has boosted its EBIT by 64%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Affle (India) can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Affle (India) 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. Over the most recent three years, Affle (India) recorded free cash flow worth 66% 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.

Summing Up

While it is always sensible to investigate a company's debt, in this case Affle (India) has ₹3.43b in net cash and a decent-looking balance sheet. And we liked the look of last year's 64% year-on-year EBIT growth. So we don't think Affle (India)'s use of debt is risky. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Affle (India)'s earnings per share history for free.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.