These 4 Measures Indicate That Ethos (NSE:ETHOSLTD) Is Using Debt Reasonably Well

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Ethos Limited (NSE:ETHOSLTD) does carry debt. But should shareholders be worried about its use of debt?

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What Risk Does Debt Bring?

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 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

What Is Ethos's Net Debt?

As you can see below, at the end of September 2024, Ethos had ₹1.80b of debt, up from ₹1.41b a year ago. Click the image for more detail. But on the other hand it also has ₹2.71b in cash, leading to a ₹917.8m net cash position.

How Strong Is Ethos' Balance Sheet?

We can see from the most recent balance sheet that Ethos had liabilities of ₹2.06b falling due within a year, and liabilities of ₹1.41b due beyond that. Offsetting this, it had ₹2.71b in cash and ₹177.3m in receivables that were due within 12 months. So its liabilities total ₹578.3m more than the combination of its cash and short-term receivables.

This state of affairs indicates that Ethos' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the ₹60.3b company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Ethos boasts net cash, so it's fair to say it does not have a heavy debt load!

See our latest analysis for Ethos

Another good sign is that Ethos has been able to increase its EBIT by 22% in twelve months, making it easier to pay down debt. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Ethos's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Ethos 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. During the last three years, Ethos burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Ethos has ₹917.8m in net cash. And it impressed us with its EBIT growth of 22% over the last year. So we don't have any problem with Ethos's use of debt. Of course, we wouldn't say no to the extra confidence that we'd gain if we knew that Ethos insiders have been buying shares: if you're on the same wavelength, you can find out if insiders are buying by clicking this link.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.