Onward Technologies (NSE:ONWARDTEC) Seems To Use Debt Quite Sensibly

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. Importantly, Onward Technologies Limited (NSE:ONWARDTEC) does carry debt. But is this debt a concern to shareholders?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

View 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 Onward Technologies had debt of ₹240.4m at the end of September 2020, a reduction from ₹316.3m over a year. But it also has ₹348.5m in cash to offset that, meaning it has ₹108.1m net cash.

A Look At Onward Technologies' Liabilities

We can see from the most recent balance sheet that Onward Technologies had liabilities of ₹439.2m falling due within a year, and liabilities of ₹281.9m due beyond that. On the other hand, it had cash of ₹348.5m and ₹495.5m worth of receivables due within a year. So it actually has ₹122.8m 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. Simply put, the fact that Onward Technologies has more cash than debt is arguably a good indication that it can manage its debt safely.

Shareholders should be aware that Onward Technologies's EBIT was down 75% last year. If that earnings trend continues then paying off its debt will be about as easy as herding cats on to a roller coaster. When analysing debt levels, the balance sheet is the obvious place to start. 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. Onward Technologies 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. Over the last three years, Onward Technologies actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Onward Technologies has net cash of ₹108.1m, as well as more liquid assets than liabilities. The cherry on top was that in converted 177% of that EBIT to free cash flow, bringing in ₹303m. So we don't have any problem with Onward Technologies's use of debt. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example - Onward Technologies has 5 warning signs we think you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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