CarTrade Tech (NSE:CARTRADE) Seems To Use Debt Rather Sparingly

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, CarTrade Tech Limited (NSE:CARTRADE) does carry debt. But should shareholders be worried about its use of debt?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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 CarTrade Tech

What Is CarTrade Tech's Net Debt?

As you can see below, at the end of September 2024, CarTrade Tech had ₹1.23b of debt, up from ₹942.7m a year ago. Click the image for more detail. But on the other hand it also has ₹6.73b in cash, leading to a ₹5.51b net cash position.

How Strong Is CarTrade Tech's Balance Sheet?

We can see from the most recent balance sheet that CarTrade Tech had liabilities of ₹2.27b falling due within a year, and liabilities of ₹1.16b due beyond that. Offsetting these obligations, it had cash of ₹6.73b as well as receivables valued at ₹647.3m due within 12 months. So it can boast ₹3.95b more liquid assets than total liabilities.

This surplus suggests that CarTrade Tech has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that CarTrade Tech has more cash than debt is arguably a good indication that it can manage its debt safely.

Better yet, CarTrade Tech grew its EBIT by 192% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if CarTrade Tech 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, a company can only pay off debt with cold hard cash, not accounting profits. While CarTrade Tech 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. During the last two years, CarTrade Tech produced sturdy free cash flow equating to 75% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While it is always sensible to investigate a company's debt, in this case CarTrade Tech has ₹5.51b in net cash and a decent-looking balance sheet. And we liked the look of last year's 192% year-on-year EBIT growth. So is CarTrade Tech's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 2 warning signs with CarTrade Tech , and understanding them should be part of your investment process.

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.