Is Info Edge (India) (NSE:NAUKRI) 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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Info Edge (India) Limited (NSE:NAUKRI) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Info Edge (India)

How Much Debt Does Info Edge (India) Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2023 Info Edge (India) had ₹2.74b of debt, an increase on ₹1.36b, over one year. However, it does have ₹40.6b in cash offsetting this, leading to net cash of ₹37.8b.

How Strong Is Info Edge (India)'s Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Info Edge (India) had liabilities of ₹12.6b due within 12 months and liabilities of ₹17.6b due beyond that. 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.

This state of affairs indicates that Info Edge (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 ₹684.1b 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 60% 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 it is future earnings, more than anything, that will determine Info Edge (India)'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.

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. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While it is always sensible to investigate a company's debt, in this case Info Edge (India) has ₹37.8b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of ₹5.6b, being 112% of its EBIT. So is Info Edge (India)'s debt a risk? It doesn't seem so to us. 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. Case in point: We've spotted 4 warning signs for Info Edge (India) you should be aware of.

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.

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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.