Intellect Design Arena (NSE:INTELLECT) Has A Pretty Healthy Balance Sheet

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.' 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. We can see that Intellect Design Arena Limited (NSE:INTELLECT) does use debt in its business. But is this debt a concern to shareholders?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth 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.

How Much Debt Does Intellect Design Arena Carry?

The image below, which you can click on for greater detail, shows that at September 2024 Intellect Design Arena had debt of ₹641.9m, up from ₹446.7m in one year. But on the other hand it also has ₹2.95b in cash, leading to a ₹2.31b net cash position.

A Look At Intellect Design Arena's Liabilities

The latest balance sheet data shows that Intellect Design Arena had liabilities of ₹7.74b due within a year, and liabilities of ₹1.05b falling due after that. Offsetting these obligations, it had cash of ₹2.95b as well as receivables valued at ₹5.31b due within 12 months. So its liabilities total ₹527.9m more than the combination of its cash and short-term receivables.

Having regard to Intellect Design Arena's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the ₹95.7b company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, Intellect Design Arena also has more cash than debt, so we're pretty confident it can manage its debt safely.

See our latest analysis for Intellect Design Arena

It is just as well that Intellect Design Arena's load is not too heavy, because its EBIT was down 22% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Intellect Design Arena's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Intellect Design Arena 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. In the last three years, Intellect Design Arena's free cash flow amounted to 47% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Intellect Design Arena has ₹2.31b in net cash. So we don't have any problem with Intellect Design Arena's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 1 warning sign for Intellect Design Arena 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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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.