We Think Navkar (NSE:NAVKARCORP) Can Stay On Top Of Its Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, Navkar Corporation Limited (NSE:NAVKARCORP) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. 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.

Check out our latest analysis for Navkar

How Much Debt Does Navkar Carry?

The image below, which you can click on for greater detail, shows that Navkar had debt of ₹439.2m at the end of March 2023, a reduction from ₹6.94b over a year. But it also has ₹914.8m in cash to offset that, meaning it has ₹475.7m net cash.

How Healthy Is Navkar's Balance Sheet?

The latest balance sheet data shows that Navkar had liabilities of ₹377.3m due within a year, and liabilities of ₹512.0m falling due after that. Offsetting these obligations, it had cash of ₹914.8m as well as receivables valued at ₹871.8m due within 12 months. So it can boast ₹897.3m more liquid assets than total liabilities.

This short term liquidity is a sign that Navkar could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Navkar has more cash than debt is arguably a good indication that it can manage its debt safely.

Sadly, Navkar's EBIT actually dropped 3.1% in the last year. If earnings continue on that decline then managing that debt will be difficult like delivering hot soup on a unicycle. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Navkar will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Navkar has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, Navkar 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 Navkar has ₹475.7m in net cash and a decent-looking balance sheet. So we are not troubled with Navkar'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 example, we've discovered 2 warning signs for Navkar (1 shouldn't be ignored!) that you should be aware of before investing here.

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.