Is Sobha (NSE:SOBHA) Using Too Much Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Sobha Limited (NSE:SOBHA) does use debt in its business. But is this debt a concern to shareholders?

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When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Sobha's Debt?

You can click the graphic below for the historical numbers, but it shows that Sobha had ₹10.1b of debt in September 2025, down from ₹15.2b, one year before. But on the other hand it also has ₹19.0b in cash, leading to a ₹8.86b net cash position.

How Healthy Is Sobha's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Sobha had liabilities of ₹132.4b due within 12 months and liabilities of ₹7.93b due beyond that. On the other hand, it had cash of ₹19.0b and ₹1.77b worth of receivables due within a year. So its liabilities total ₹119.6b more than the combination of its cash and short-term receivables.

This is a mountain of leverage relative to its market capitalization of ₹168.7b. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. While it does have liabilities worth noting, Sobha also has more cash than debt, so we're pretty confident it can manage its debt safely.

Check out our latest analysis for Sobha

Notably Sobha's EBIT was pretty flat over the last year. We would prefer to see some earnings growth, because that always helps diminish debt. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Sobha's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Sobha 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. Happily for any shareholders, Sobha actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

Although Sobha's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of ₹8.86b. And it impressed us with free cash flow of ₹1.5b, being 187% of its EBIT. So we don't have any problem with Sobha's use of debt. Of course, we wouldn't say no to the extra confidence that we'd gain if we knew that Sobha insiders have been buying shares: if you're on the same wavelength, you can find out if insiders are buying by clicking this link.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.