We Think Intellect Design Arena (NSE:INTELLECT) Can Stay On Top Of Its Debt

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.' 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. As with many other companies Intellect Design Arena Limited (NSE:INTELLECT) makes use of debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Intellect Design Arena

What Is Intellect Design Arena's Net Debt?

The image below, which you can click on for greater detail, shows that at March 2023 Intellect Design Arena had debt of ₹271.3m, up from ₹204.2m in one year. However, its balance sheet shows it holds ₹1.24b in cash, so it actually has ₹971.8m net cash.

How Strong Is Intellect Design Arena's Balance Sheet?

According to the last reported balance sheet, Intellect Design Arena had liabilities of ₹8.00b due within 12 months, and liabilities of ₹183.6m due beyond 12 months. On the other hand, it had cash of ₹1.24b and ₹11.6b worth of receivables due within a year. So it actually has ₹4.64b 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!

On the other hand, Intellect Design Arena's EBIT dived 12%, over the last year. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. There's no doubt that we learn most about debt from the balance sheet. 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. During the last three years, Intellect Design Arena produced sturdy free cash flow equating to 54% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Intellect Design Arena has net cash of ₹971.8m, as well as more liquid assets than liabilities. So we don't have any problem with Intellect Design Arena'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. Case in point: We've spotted 2 warning signs for Intellect Design Arena you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.