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

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 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 Intellect Design Arena Limited (NSE:INTELLECT) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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 Intellect Design Arena

How Much Debt Does Intellect Design Arena Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2023 Intellect Design Arena had ₹446.7m of debt, an increase on ₹185.6m, over one year. But on the other hand it also has ₹1.80b in cash, leading to a ₹1.36b net cash position.

How Healthy Is Intellect Design Arena's Balance Sheet?

According to the last reported balance sheet, Intellect Design Arena had liabilities of ₹7.61b due within 12 months, and liabilities of ₹461.7m due beyond 12 months. On the other hand, it had cash of ₹1.80b and ₹3.80b worth of receivables due within a year. So its liabilities total ₹2.47b more than the combination of its cash and short-term receivables.

This state of affairs indicates that Intellect Design Arena's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the ₹136.8b company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Intellect Design Arena boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Intellect Design Arena grew its EBIT by 34% over the last twelve months, and that growth will make it easier to handle its debt. 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 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 company can only pay off debt with cold hard cash, not accounting profits. 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 ₹1.36b in net cash. And it impressed us with its EBIT growth of 34% over the last year. So we don't think Intellect Design Arena's use of debt is risky. 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. We've identified 1 warning sign with Intellect Design Arena , and understanding them should be part of your investment process.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.