These 4 Measures Indicate That Black Box (NSE:BBOX) Is Using Debt Reasonably Well

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We can see that Black Box Limited (NSE:BBOX) does use debt in its business. But the more important question is: how much risk is that debt creating?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Black Box

How Much Debt Does Black Box Carry?

You can click the graphic below for the historical numbers, but it shows that Black Box had ₹1.79b of debt in September 2021, down from ₹4.08b, one year before. However, it does have ₹2.21b in cash offsetting this, leading to net cash of ₹423.0m.

A Look At Black Box's Liabilities

We can see from the most recent balance sheet that Black Box had liabilities of ₹16.8b falling due within a year, and liabilities of ₹4.83b due beyond that. Offsetting these obligations, it had cash of ₹2.21b as well as receivables valued at ₹3.03b due within 12 months. So it has liabilities totalling ₹16.3b more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Black Box has a market capitalization of ₹32.1b, and so it could probably strengthen its balance sheet by raising capital if it needed to. 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, Black Box also has more cash than debt, so we're pretty confident it can manage its debt safely.

But the bad news is that Black Box has seen its EBIT plunge 19% in the last twelve months. If that rate of decline in earnings continues, the company could find itself in a tight spot. When analysing debt levels, the balance sheet is the obvious place to start. But it is Black Box'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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Black Box 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 three years, Black Box 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 Black Box's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of ₹423.0m. And it impressed us with free cash flow of ₹1.7b, being 205% of its EBIT. So we don't have any problem with Black Box's use of debt. 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 instance, we've identified 1 warning sign for Black Box that you should be aware of.

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.