We Think Netweb Technologies India (NSE:NETWEB) Can Stay On Top Of Its 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.' 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. We note that Netweb Technologies India Limited (NSE:NETWEB) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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 examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Netweb Technologies India

How Much Debt Does Netweb Technologies India Carry?

The image below, which you can click on for greater detail, shows that Netweb Technologies India had debt of ₹127.0m at the end of September 2023, a reduction from ₹304.0m over a year. However, it does have ₹1.95b in cash offsetting this, leading to net cash of ₹1.82b.

How Strong Is Netweb Technologies India's Balance Sheet?

According to the last reported balance sheet, Netweb Technologies India had liabilities of ₹809.6m due within 12 months, and liabilities of ₹125.1m due beyond 12 months. Offsetting these obligations, it had cash of ₹1.95b as well as receivables valued at ₹1.46b due within 12 months. So it actually has ₹2.47b more liquid assets than total liabilities.

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

Another good sign is that Netweb Technologies India has been able to increase its EBIT by 25% in twelve months, making it easier to pay down debt. 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 Netweb Technologies India's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Netweb Technologies India 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, Netweb Technologies India 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 it is always sensible to investigate a company's debt, in this case Netweb Technologies India has ₹1.82b in net cash and a decent-looking balance sheet. And we liked the look of last year's 25% year-on-year EBIT growth. So we are not troubled with Netweb Technologies India's debt use. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Netweb Technologies India's earnings per share history for free.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.