Intellect Design Arena (NSE:INTELLECT) Seems To Use Debt Rather Sparingly

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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. We can see that Intellect Design Arena Limited (NSE:INTELLECT) 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 is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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 Intellect Design Arena

How Much Debt Does Intellect Design Arena Carry?

The image below, which you can click on for greater detail, shows that Intellect Design Arena had debt of ₹204.2m at the end of March 2022, a reduction from ₹824.6m over a year. But it also has ₹5.10b in cash to offset that, meaning it has ₹4.90b net cash.

How Strong Is Intellect Design Arena's Balance Sheet?

The latest balance sheet data shows that Intellect Design Arena had liabilities of ₹7.63b due within a year, and liabilities of ₹89.8m falling due after that. Offsetting this, it had ₹5.10b in cash and ₹9.15b in receivables that were due within 12 months. So it can boast ₹6.54b more liquid assets than total liabilities.

This surplus suggests that Intellect Design Arena has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Intellect Design Arena boasts net cash, so it's fair to say it does not have a heavy debt load!

Also positive, Intellect Design Arena grew its EBIT by 25% in the last year, and that should make it easier to pay down debt, going forward. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Intellect Design Arena 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. Intellect Design Arena 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, Intellect Design Arena generated free cash flow amounting to a very robust 87% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Intellect Design Arena has net cash of ₹4.90b, as well as more liquid assets than liabilities. The cherry on top was that in converted 87% of that EBIT to free cash flow, bringing in ₹3.2b. So is Intellect Design Arena's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Intellect Design Arena you should know about.

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.