Here's Why Panache Digilife (NSE:PANACHE) Can Manage Its Debt Responsibly

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 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 Panache Digilife Limited (NSE:PANACHE) makes use of debt. But is this debt a concern to shareholders?

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Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Panache Digilife's Debt?

You can click the graphic below for the historical numbers, but it shows that Panache Digilife had ₹134.2m of debt in September 2024, down from ₹343.0m, one year before. However, it does have ₹61.2m in cash offsetting this, leading to net debt of about ₹73.0m.

How Healthy Is Panache Digilife's Balance Sheet?

The latest balance sheet data shows that Panache Digilife had liabilities of ₹191.4m due within a year, and liabilities of ₹28.0m falling due after that. Offsetting these obligations, it had cash of ₹61.2m as well as receivables valued at ₹362.2m due within 12 months. So it actually has ₹204.1m more liquid assets than total liabilities.

This surplus suggests that Panache Digilife has a conservative balance sheet, and could probably eliminate its debt without much difficulty.

View our latest analysis for Panache Digilife

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.

Panache Digilife's net debt is only 0.67 times its EBITDA. And its EBIT covers its interest expense a whopping 24.0 times over. So you could argue it is no more threatened by its debt than an elephant is by a mouse. Better yet, Panache Digilife grew its EBIT by 130% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Panache Digilife 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. So the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. Over the last three years, Panache Digilife saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Our View

Panache Digilife's interest cover suggests it can handle its debt as easily as Cristiano Ronaldo could score a goal against an under 14's goalkeeper. But we must concede we find its conversion of EBIT to free cash flow has the opposite effect. When we consider the range of factors above, it looks like Panache Digilife is pretty sensible with its use of debt. While that brings some risk, it can also enhance returns for shareholders. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 3 warning signs with Panache Digilife (at least 1 which is a bit concerning) , and understanding them should be part of your investment process.

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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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.