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, A2Z Infra Engineering Limited (NSE:A2ZINFRA) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for A2Z Infra Engineering

What Is A2Z Infra Engineering's Debt?

The image below, which you can click on for greater detail, shows that A2Z Infra Engineering had debt of ₹3.35b at the end of March 2019, a reduction from ₹12.6b over a year. On the flip side, it has ₹2.31b in cash leading to net debt of about ₹1.04b.

How Strong Is A2Z Infra Engineering's Balance Sheet?

According to the last reported balance sheet, A2Z Infra Engineering had liabilities of ₹14.4b due within 12 months, and liabilities of ₹533.6m due beyond 12 months. Offsetting these obligations, it had cash of ₹2.31b as well as receivables valued at ₹12.4b due within 12 months. So these liquid assets roughly match the total liabilities.

Given A2Z Infra Engineering has a market capitalization of ₹1.67b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).