Here's Why Exide Industries (NSE:EXIDEIND) Can Manage Its Debt Responsibly

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. Importantly, Exide Industries Limited (NSE:EXIDEIND) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Exide Industries

What Is Exide Industries's Net Debt?

The image below, which you can click on for greater detail, shows that at March 2022 Exide Industries had debt of ₹2.09b, up from ₹1.38b in one year. But on the other hand it also has ₹9.11b in cash, leading to a ₹7.01b net cash position.

How Strong Is Exide Industries' Balance Sheet?

According to the last reported balance sheet, Exide Industries had liabilities of ₹28.2b due within 12 months, and liabilities of ₹4.69b due beyond 12 months. Offsetting this, it had ₹9.11b in cash and ₹11.0b in receivables that were due within 12 months. So its liabilities total ₹12.8b more than the combination of its cash and short-term receivables.

Of course, Exide Industries has a market capitalization of ₹117.5b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Exide Industries also has more cash than debt, so we're pretty confident it can manage its debt safely.

In fact Exide Industries's saving grace is its low debt levels, because its EBIT has tanked 73% in the last twelve months. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Exide Industries can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Exide Industries has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. In the last three years, Exide Industries's free cash flow amounted to 30% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing up

While Exide Industries does have more liabilities than liquid assets, it also has net cash of ₹7.01b. So we don't have any problem with Exide Industries's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 1 warning sign for Exide Industries that you should be aware of before investing here.

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.