Is Kavveri Defence & Wireless Technologies (NSE:KAVDEFENCE) Using Too Much Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Kavveri Defence & Wireless Technologies Limited (NSE:KAVDEFENCE) makes use of debt. But is this debt a concern to shareholders?

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When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own 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.

What Is Kavveri Defence & Wireless Technologies's Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2025 Kavveri Defence & Wireless Technologies had ₹189.3m of debt, an increase on none, over one year. However, because it has a cash reserve of ₹143.5m, its net debt is less, at about ₹45.7m.

How Strong Is Kavveri Defence & Wireless Technologies' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Kavveri Defence & Wireless Technologies had liabilities of ₹366.6m due within 12 months and no liabilities due beyond that. Offsetting these obligations, it had cash of ₹143.5m as well as receivables valued at ₹78.1m due within 12 months. So its liabilities total ₹144.9m more than the combination of its cash and short-term receivables.

Of course, Kavveri Defence & Wireless Technologies has a market capitalization of ₹1.28b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse.

Check out our latest analysis for Kavveri Defence & Wireless Technologies

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Kavveri Defence & Wireless Technologies's net debt is only 0.56 times its EBITDA. And its EBIT easily covers its interest expense, being 216 times the size. So you could argue it is no more threatened by its debt than an elephant is by a mouse. Although Kavveri Defence & Wireless Technologies made a loss at the EBIT level, last year, it was also good to see that it generated ₹78m in EBIT over the last twelve months. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Kavveri Defence & Wireless Technologies will need earnings to service that debt. 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. So it's worth checking how much of the earnings before interest and tax (EBIT) is backed by free cash flow. Over the last year, Kavveri Defence & Wireless Technologies barely recorded positive free cash flow, in total. Some might say that's a concern, when it comes considering how easily it would be for it to down debt.

Our View

On our analysis Kavveri Defence & Wireless Technologies's interest cover should signal that it won't have too much trouble with its debt. But the other factors we noted above weren't so encouraging. In particular, conversion of EBIT to free cash flow gives us cold feet. When we consider all the elements mentioned above, it seems to us that Kavveri Defence & Wireless Technologies is managing its debt quite well. Having said that, the load is sufficiently heavy that we would recommend any shareholders keep a close eye on it. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 2 warning signs for Kavveri Defence & Wireless Technologies you should be aware of.

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.