Arvind SmartSpaces (NSE:ARVSMART) Has A Pretty Healthy Balance Sheet

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.' 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, Arvind SmartSpaces Limited (NSE:ARVSMART) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. 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

What Is Arvind SmartSpaces's Debt?

As you can see below, Arvind SmartSpaces had ₹301.7m of debt at March 2022, down from ₹1.97b a year prior. But it also has ₹1.53b in cash to offset that, meaning it has ₹1.23b net cash.

A Look At Arvind SmartSpaces' Liabilities

The latest balance sheet data shows that Arvind SmartSpaces had liabilities of ₹6.27b due within a year, and liabilities of ₹319.9m falling due after that. On the other hand, it had cash of ₹1.53b and ₹15.7m worth of receivables due within a year. So it has liabilities totalling ₹5.05b more than its cash and near-term receivables, combined.

This deficit isn't so bad because Arvind SmartSpaces is worth ₹10.4b, and thus could probably raise enough capital to shore up 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. 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.

Also good is that Arvind SmartSpaces grew its EBIT at 11% over the last year, further increasing its ability to manage debt. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Arvind SmartSpaces will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Arvind SmartSpaces 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, 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

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 ₹1.23b. The cherry on top was that in converted 146% of that EBIT to free cash flow, bringing in ₹1.5b. So we don't think Arvind SmartSpaces's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example Arvind SmartSpaces has 4 warning signs (and 1 which makes us a bit uncomfortable) we think 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.