Info Edge (India) (NSE:NAUKRI) Could Easily Take On More 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.' 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, Info Edge (India) Limited (NSE:NAUKRI) does carry debt. But is this debt a concern to shareholders?

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. If things get really bad, the lenders can take control of the business. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth 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 Info Edge (India)

How Much Debt Does Info Edge (India) Carry?

The image below, which you can click on for greater detail, shows that at September 2023 Info Edge (India) had debt of ₹274.4m, up from ₹170.3m in one year. However, its balance sheet shows it holds ₹40.6b in cash, so it actually has ₹40.3b net cash.

A Look At Info Edge (India)'s Liabilities

According to the last reported balance sheet, Info Edge (India) had liabilities of ₹12.6b due within 12 months, and liabilities of ₹17.6b due beyond 12 months. Offsetting this, it had ₹40.6b in cash and ₹157.0m in receivables that were due within 12 months. So it actually has ₹10.5b more liquid assets than total liabilities.

Having regard to Info Edge (India)'s size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the ₹612.2b company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that Info Edge (India) has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, Info Edge (India) grew its EBIT by 84% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Info Edge (India) 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Info Edge (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 last three years, Info Edge (India) actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Info Edge (India) has net cash of ₹40.3b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of ₹5.6b, being 116% of its EBIT. So we don't think Info Edge (India)'s use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 2 warning signs we've spotted with Info Edge (India) .

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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.