We Think Ashiana Housing (NSE:ASHIANA) 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. Importantly, Ashiana Housing Limited (NSE:ASHIANA) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, 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.

Check out our latest analysis for Ashiana Housing

What Is Ashiana Housing's Debt?

You can click the graphic below for the historical numbers, but it shows that Ashiana Housing had ₹1.47b of debt in September 2023, down from ₹1.74b, one year before. However, it does have ₹2.54b in cash offsetting this, leading to net cash of ₹1.08b.

How Strong Is Ashiana Housing's Balance Sheet?

The latest balance sheet data shows that Ashiana Housing had liabilities of ₹12.9b due within a year, and liabilities of ₹1.86b falling due after that. Offsetting this, it had ₹2.54b in cash and ₹401.2m in receivables that were due within 12 months. So it has liabilities totalling ₹11.8b more than its cash and near-term receivables, combined.

Ashiana Housing has a market capitalization of ₹26.7b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Despite its noteworthy liabilities, Ashiana Housing boasts net cash, so it's fair to say it does not have a heavy debt load!

It was also good to see that despite losing money on the EBIT line last year, Ashiana Housing turned things around in the last 12 months, delivering and EBIT of ₹455m. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Ashiana Housing will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Ashiana Housing 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 year, Ashiana Housing 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

Although Ashiana Housing's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of ₹1.08b. And it impressed us with free cash flow of ₹714m, being 157% of its EBIT. So we don't have any problem with Ashiana Housing's use of debt. We'd be motivated to research the stock further if we found out that Ashiana Housing insiders have bought shares recently. If you would too, then you're in luck, since today we're sharing our list of reported insider transactions for free.

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.

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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.