Onward Technologies (NSE:ONWARDTEC) Has A Pretty Healthy Balance Sheet

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. As with many other companies Onward Technologies Limited (NSE:ONWARDTEC) makes use of debt. But the real question is whether this debt is making the company risky.

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. 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. 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 Onward Technologies

What Is Onward Technologies's Debt?

You can click the graphic below for the historical numbers, but it shows that Onward Technologies had ₹167.3m of debt in March 2023, down from ₹187.0m, one year before. But it also has ₹480.5m in cash to offset that, meaning it has ₹313.2m net cash.

How Healthy Is Onward Technologies' Balance Sheet?

The latest balance sheet data shows that Onward Technologies had liabilities of ₹551.7m due within a year, and liabilities of ₹132.1m falling due after that. On the other hand, it had cash of ₹480.5m and ₹1.11b worth of receivables due within a year. So it can boast ₹903.8m more liquid assets than total liabilities.

This short term liquidity is a sign that Onward Technologies could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Onward Technologies has more cash than debt is arguably a good indication that it can manage its debt safely.

In addition to that, we're happy to report that Onward Technologies has boosted its EBIT by 64%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Onward Technologies's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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. Over the last three years, Onward Technologies saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is 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 ₹313.2m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 64% over the last year. So we are not troubled with Onward Technologies's debt use. 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. To that end, you should be aware of the 2 warning signs we've spotted with Onward Technologies .

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.