Is SRM Contractors (NSE:SRM) A Risky Investment?
Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that SRM Contractors Limited (NSE:SRM) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.
When Is Debt A Problem?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.
What Is SRM Contractors's Net Debt?
As you can see below, at the end of September 2025, SRM Contractors had ₹592.6m of debt, up from ₹369.8m a year ago. Click the image for more detail. But it also has ₹1.35b in cash to offset that, meaning it has ₹754.7m net cash.
A Look At SRM Contractors' Liabilities
We can see from the most recent balance sheet that SRM Contractors had liabilities of ₹1.92b falling due within a year, and liabilities of ₹258.4m due beyond that. Offsetting this, it had ₹1.35b in cash and ₹1.30b in receivables that were due within 12 months. So it can boast ₹478.1m more liquid assets than total liabilities.
This surplus suggests that SRM Contractors has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that SRM Contractors has more cash than debt is arguably a good indication that it can manage its debt safely.
View our latest analysis for SRM Contractors
Even more impressive was the fact that SRM Contractors grew its EBIT by 155% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since SRM Contractors 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. SRM Contractors may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, SRM Contractors 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.
Summing Up
While it is always sensible to investigate a company's debt, in this case SRM Contractors has ₹754.7m in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 155% over the last year. So we don't have any problem with SRM Contractors's use of debt. Over time, share prices tend to follow earnings per share, so if you're interested in SRM Contractors, you may well want to click here to check an interactive graph of its earnings per share history.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.