Infibeam Avenues (NSE:INFIBEAM) Seems To Use Debt Rather Sparingly

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We can see that Infibeam Avenues Limited (NSE:INFIBEAM) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Infibeam Avenues

How Much Debt Does Infibeam Avenues Carry?

You can click the graphic below for the historical numbers, but it shows that Infibeam Avenues had ₹185.2m of debt in March 2021, down from ₹283.9m, one year before. But it also has ₹3.45b in cash to offset that, meaning it has ₹3.27b net cash.

A Look At Infibeam Avenues' Liabilities

We can see from the most recent balance sheet that Infibeam Avenues had liabilities of ₹6.09b falling due within a year, and liabilities of ₹530.8m due beyond that. Offsetting this, it had ₹3.45b in cash and ₹744.7m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹2.42b.

Of course, Infibeam Avenues has a market capitalization of ₹68.1b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Infibeam Avenues also has more cash than debt, so we're pretty confident it can manage its debt safely.

Fortunately, Infibeam Avenues grew its EBIT by 7.8% in the last year, making that debt load look even more manageable. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Infibeam Avenues can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Infibeam Avenues 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, Infibeam Avenues generated free cash flow amounting to a very robust 89% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Infibeam Avenues has ₹3.27b in net cash. The cherry on top was that in converted 89% of that EBIT to free cash flow, bringing in ₹725m. So is Infibeam Avenues'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. Case in point: We've spotted 3 warning signs for Infibeam Avenues you should be aware of.

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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