We Think Astra Microwave Products (NSE:ASTRAMICRO) Can Stay On Top Of Its Debt

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. We note that Astra Microwave Products Limited (NSE:ASTRAMICRO) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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 think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Astra Microwave Products

How Much Debt Does Astra Microwave Products Carry?

You can click the graphic below for the historical numbers, but it shows that Astra Microwave Products had ₹682.8m of debt in September 2023, down from ₹1.54b, one year before. However, its balance sheet shows it holds ₹1.67b in cash, so it actually has ₹984.0m net cash.

How Strong Is Astra Microwave Products' Balance Sheet?

According to the last reported balance sheet, Astra Microwave Products had liabilities of ₹2.56b due within 12 months, and liabilities of ₹595.0m due beyond 12 months. On the other hand, it had cash of ₹1.67b and ₹2.84b worth of receivables due within a year. So it can boast ₹1.35b more liquid assets than total liabilities.

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

One way Astra Microwave Products could vanquish its debt would be if it stops borrowing more but continues to grow EBIT at around 12%, as it did over the last year. 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 Astra Microwave Products's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Astra Microwave Products 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. In the last three years, Astra Microwave Products basically broke even on a free cash flow basis. Some might say that's a concern, when it comes considering how easily it would be for it to down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Astra Microwave Products has net cash of ₹984.0m, as well as more liquid assets than liabilities. And it also grew its EBIT by 12% over the last year. So we are not troubled with Astra Microwave Products's debt use. 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. For instance, we've identified 1 warning sign for Astra Microwave Products that 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.