Howard Marks said it well when he said that, rather than worrying about stock price volatility, “the possibility of permanent loss is the risk I worry about…and that every practical investor that I know is worried”. So it seems smart money knows that debt – which is usually involved in bankruptcies – is a very important factor when you’re assessing a company’s risk. We note that Endurance Technologies Limited (NSE:ENDURANCE) has debt on its balance sheet. But the real question is whether this debt makes the business risky.
When is debt dangerous?
Debt helps a business until the business struggles to pay it back, either with new capital or with free cash flow. If things go really bad, lenders can take over the business. However, a more frequent (but still costly) event is when a company has to issue shares at bargain prices, permanently diluting shareholders, just to shore up its balance sheet. That said, the most common situation is when a company manages its debt reasonably well – and to its own benefit. The first step when considering a company’s debt levels is to consider its cash and debt together.
Check out our latest analysis for Endurance Technologies
What is Endurance Technologies’ debt?
The image below, which you can click on for more details, shows that Endurance Technologies had debt of ₹3.99 billion at the end of March 2022, a reduction from ₹5.93 billion year on year . But on the other hand, it also has ₹8.88 billion in cash, resulting in a net cash position of ₹4.89 billion.
How healthy is Endurance Technologies’ balance sheet?
Zooming in on the latest balance sheet data, we can see that Endurance Technologies had liabilities of ₹16.6 billion due within 12 months and liabilities of ₹2.80 billion due beyond. In return, he had ₹8.88 billion in cash and ₹10.2 billion in receivables due within 12 months. Thus, its total liabilities match its short-term liquid assets almost perfectly.
Given the size of Endurance Technologies, it appears its cash is well balanced with its total liabilities. It is therefore highly unlikely that the ₹198.6bn company will run out of cash, but it is still worth keeping an eye on the balance sheet. Despite its notable liabilities, Endurance Technologies has net cash, so it’s fair to say that it doesn’t have a lot of debt!
On the other hand, Endurance Technologies has seen its EBIT fall by 9.1% over the last twelve months. This type of decline, if it continues, will obviously make the debt more difficult to manage. There is no doubt that we learn the most about debt from the balance sheet. But ultimately, the company’s future profitability will decide whether Endurance Technologies can strengthen its balance sheet over time. So if you are focused on the future, you can check out this free report showing analyst earnings forecast.
Finally, a business needs free cash flow to pay off its debts; book profits are not enough. Although Endurance Technologies has net cash on its balance sheet, it’s still worth looking at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it’s building (or erodes) that treasury. balance. Over the past three years, Endurance Technologies has recorded a free cash flow of 46% of its EBIT, which is lower than expected. That’s not great when it comes to paying off debt.
Summary
While it’s always a good idea to look at a company’s total liabilities, it’s very reassuring that Endurance Technologies has ₹4.89 billion in net cash. So we have no problem with Endurance Technologies’ use of debt. The balance sheet is clearly the area to focus on when analyzing debt. However, not all investment risks reside on the balance sheet, far from it. These risks can be difficult to spot. Every business has them, and we’ve spotted 1 warning sign for Endurance Technologies you should know.
In the end, it’s often best to focus on companies that aren’t in debt. You can access our special list of these companies (all with a track record of earnings growth). It’s free.
Feedback on this article? Concerned about content? Get in touch with us directly. You can also email the editorial team (at) Simplywallst.com.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.
Comments are closed.