We Think Arvind SmartSpaces (NSE:ARVSMART) Can Stay On Top Of Its Debt

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 can see that Arvind SmartSpaces Limited (NSE:ARVSMART) does use debt in its business. But is this debt a concern to shareholders?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Arvind SmartSpaces

What Is Arvind SmartSpaces's Debt?

You can click the graphic below for the historical numbers, but it shows that Arvind SmartSpaces had ₹759.5m of debt in September 2023, down from ₹1.09b, one year before. But on the other hand it also has ₹2.16b in cash, leading to a ₹1.41b net cash position.

A Look At Arvind SmartSpaces' Liabilities

According to the last reported balance sheet, Arvind SmartSpaces had liabilities of ₹11.6b due within 12 months, and liabilities of ₹785.6m due beyond 12 months. Offsetting this, it had ₹2.16b in cash and ₹30.6m in receivables that were due within 12 months. So its liabilities total ₹10.2b more than the combination of its cash and short-term receivables.

Arvind SmartSpaces has a market capitalization of ₹31.6b, so it could very likely raise cash to ameliorate 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 97% 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs 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. Over the last three years, Arvind SmartSpaces actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While Arvind SmartSpaces does have more liabilities than liquid assets, it also has net cash of ₹1.41b. And it impressed us with free cash flow of ₹1.7b, being 126% of its EBIT. So is Arvind SmartSpaces'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. For example - Arvind SmartSpaces has 1 warning sign we think 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.