Is Arvind SmartSpaces (NSE:ARVSMART) A Risky Investment?

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. We can see that Arvind SmartSpaces Limited (NSE:ARVSMART) does use debt in its business. 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. 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. 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.

View our latest analysis for Arvind SmartSpaces

How Much Debt Does Arvind SmartSpaces Carry?

You can click the graphic below for the historical numbers, but it shows that Arvind SmartSpaces had ₹1.10b of debt in March 2024, down from ₹1.46b, one year before. However, its balance sheet shows it holds ₹1.66b in cash, so it actually has ₹560.9m net cash.

How Healthy Is Arvind SmartSpaces' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Arvind SmartSpaces had liabilities of ₹13.8b due within 12 months and liabilities of ₹989.7m due beyond that. Offsetting this, it had ₹1.66b in cash and ₹27.7m in receivables that were due within 12 months. So its liabilities total ₹13.1b more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Arvind SmartSpaces is worth ₹39.3b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. While it does have liabilities worth noting, Arvind SmartSpaces also has more cash than debt, so we're pretty confident it can manage its debt safely.

It is well worth noting that Arvind SmartSpaces's EBIT shot up like bamboo after rain, gaining 46% in the last twelve months. That'll make it easier to manage its debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Arvind SmartSpaces 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. Arvind SmartSpaces may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. In the last three years, Arvind SmartSpaces's free cash flow amounted to 48% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

Although Arvind SmartSpaces's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of ₹560.9m. And it impressed us with its EBIT growth of 46% over the last year. So we don't have any problem with Arvind SmartSpaces's use of debt. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Arvind SmartSpaces you should know about.

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.