These 4 Measures Indicate That Navneet Education (NSE:NAVNETEDUL) Is Using Debt Safely

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Navneet Education Limited (NSE:NAVNETEDUL) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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 Navneet Education

What Is Navneet Education's Debt?

As you can see below, Navneet Education had ₹408.7m of debt, at September 2022, which is about the same as the year before. You can click the chart for greater detail. However, its balance sheet shows it holds ₹963.7m in cash, so it actually has ₹555.0m net cash.

A Look At Navneet Education's Liabilities

Zooming in on the latest balance sheet data, we can see that Navneet Education had liabilities of ₹2.78b due within 12 months and liabilities of ₹215.0m due beyond that. On the other hand, it had cash of ₹963.7m and ₹2.71b worth of receivables due within a year. So it actually has ₹676.2m more liquid assets than total liabilities.

This short term liquidity is a sign that Navneet Education could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Navneet Education boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that Navneet Education grew its EBIT by 379% over twelve months. That boost will make it even easier to pay down debt going forward. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Navneet Education'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 Navneet Education 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, Navneet Education recorded free cash flow worth 56% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While it is always sensible to investigate a company's debt, in this case Navneet Education has ₹555.0m in net cash and a decent-looking balance sheet. And we liked the look of last year's 379% year-on-year EBIT growth. So we don't think Navneet Education's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example - Navneet Education has 2 warning signs we think you should be aware of.

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.