David Iben put it well when he said: “Volatility is not a risk that is close to our hearts. What matters to us is to avoid the permanent loss of capital. ‘ So it seems like smart money knows that debt – which is usually involved in bankruptcies – is a very important factor, when you assess the level of risk of a business. Like many other companies Navin Fluor International Limited (NSE: NAVIFLUOR) uses debt. But should shareholders be concerned about its use of debt?
When is debt a problem?
Debts and other liabilities become risky for a business when it cannot easily meet these obligations, either with free cash flow or by raising capital at an attractive price. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are ruthlessly liquidated by their bankers. However, a more common (but still costly) situation is where a company has to dilute its shareholders at a cheap share price just to get its debt under control. Of course, the advantage of debt is that it often represents cheap capital, especially when it replaces dilution in a business with the ability to reinvest at high rates of return. When we think of a business’s use of debt, we first look at cash flow and debt together.
See our latest review for Navin Fluorine International
What is Navin Fluorine International’s net debt?
As you can see below, at the end of March 2021, Navin Fluorine International had a debt of 254.1 million yen, up from 230.8 million yen a year ago. Click on the image for more details. But he also has 6.13 billion yen in cash to make up for that, which means he has 5.88 billion yen in net cash.
A look at the responsibilities of Navin Fluorine International
Zooming in on the latest balance sheet data, we can see that Navin Fluorine International had liabilities of 2.02 billion yen owed within 12 months and liabilities of 616.1 million yen beyond. On the other hand, he had cash of 6.13 billion yen and 2.91 billion yen in receivables within a year. So it actually has ₹ 6.40b Following liquid assets as total liabilities.
This surplus suggests that Navin Fluorite International has a conservative balance sheet, and could probably eliminate its debt without too much difficulty. In short, Navin Fluorine International has a net cash flow, so it’s fair to say that it doesn’t have a heavy debt load!
Also positive, Navin Fluorine International has increased its EBIT by 28% over the past year, which should make it easier to repay debt going forward. When analyzing debt levels, the balance sheet is the obvious starting point. But it is future profits, more than anything, that will determine Navin Fluorine International’s ability to maintain a healthy balance sheet in the future. So if you are focused on the future you can check this out free report showing analysts’ earnings forecasts.
Finally, while the IRS may love accounting profits, lenders only accept hard cash. Although Navin Fluorine International has net cash on its balance sheet, it is still worth examining its ability to convert earnings before interest and taxes (EBIT) into free cash flow, to help us understand how fast it is building. (or erode) that cash balance. Over the past three years, Navin Fluorine International has recorded free cash flow of 33% of its EBIT, which is lower than expected. This low cash conversion makes debt management more difficult.
While it’s always a good idea to investigate a company’s debt, in this case Navin Fluorine International has 5.88 billion yen in net cash and a decent balance sheet. And we liked the appearance of the 28% year-over-year EBIT growth from last year. So is Navin Fluorine International’s debt a risk? It does not seem to us. There is no doubt that we learn the most about debt from the balance sheet. However, not all investment risks lie on the balance sheet – far from it. For example, we have identified 2 warning signs for Navin Fluorine International that you need to be aware of.
Of course, if you are the type of investor who prefers to buy stocks without going into debt, don’t hesitate to check out our exclusive list of cash-flow-growing stocks today.
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