Is Onward Technologies (NSE:ONWARDTEC) A Risky Investment?

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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Onward Technologies Limited (NSE:ONWARDTEC) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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 step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Onward Technologies

What Is Onward Technologies's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2022 Onward Technologies had debt of ₹190.9m, up from ₹102.9m in one year. However, it does have ₹341.4m in cash offsetting this, leading to net cash of ₹150.5m.

How Strong Is Onward Technologies' Balance Sheet?

We can see from the most recent balance sheet that Onward Technologies had liabilities of ₹481.8m falling due within a year, and liabilities of ₹156.9m due beyond that. Offsetting these obligations, it had cash of ₹341.4m as well as receivables valued at ₹958.8m due within 12 months. So it can boast ₹661.5m more liquid assets than total liabilities.

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

Even more impressive was the fact that Onward Technologies grew its EBIT by 134% over twelve months. That boost will make it even easier to pay down debt going forward. There's no doubt that we learn most about debt from the balance sheet. But it is Onward Technologies's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Onward Technologies 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, Onward Technologies burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Onward Technologies has net cash of ₹150.5m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 134% over the last year. So we don't have any problem with Onward Technologies's use of debt. 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. For example, we've discovered 5 warning signs for Onward Technologies that you should be aware of before investing here.

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.