Is Arvind SmartSpaces (NSE:ARVSMART) Using Too Much 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 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. Importantly, Arvind SmartSpaces Limited (NSE:ARVSMART) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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, 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.

View our latest analysis for Arvind SmartSpaces

How Much Debt Does Arvind SmartSpaces Carry?

The image below, which you can click on for greater detail, shows that Arvind SmartSpaces had debt of ₹301.7m at the end of March 2022, a reduction from ₹1.89b over a year. However, its balance sheet shows it holds ₹1.53b in cash, so it actually has ₹1.23b 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 ₹6.27b due within 12 months and liabilities of ₹319.9m due beyond that. Offsetting these obligations, it had cash of ₹1.53b as well as receivables valued at ₹10.6m due within 12 months. So its liabilities total ₹5.05b more than the combination of its cash and short-term receivables.

This is a mountain of leverage relative to its market capitalization of ₹6.54b. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. 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.

We note that Arvind SmartSpaces grew its EBIT by 20% in the last year, and that should make it easier to pay down debt, going forward. When analysing debt levels, the balance sheet is the obvious place to start. But it is Arvind SmartSpaces's earnings that will influence how the balance sheet holds up in the future. 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. Happily for any shareholders, Arvind SmartSpaces actually produced more free cash flow than EBIT over the last three years. 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. And it impressed us with free cash flow of ₹1.5b, being 119% of its EBIT. So we are not troubled with Arvind SmartSpaces's debt use. 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. To that end, you should learn about the 4 warning signs we've spotted with Arvind SmartSpaces (including 1 which shouldn't be ignored) .

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.