Is Exide Industries (NSE:EXIDEIND) A Risky Investment?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. As with many other companies Exide Industries Limited (NSE:EXIDEIND) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. 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. 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. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Exide Industries

How Much Debt Does Exide Industries Carry?

You can click the graphic below for the historical numbers, but it shows that as of March 2023 Exide Industries had ₹2.79b of debt, an increase on ₹2.09b, over one year. But it also has ₹7.44b in cash to offset that, meaning it has ₹4.64b net cash.

How Strong Is Exide Industries' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Exide Industries had liabilities of ₹30.2b due within 12 months and liabilities of ₹6.02b due beyond that. Offsetting this, it had ₹7.44b in cash and ₹12.3b in receivables that were due within 12 months. So it has liabilities totalling ₹16.5b more than its cash and near-term receivables, combined.

Since publicly traded Exide Industries shares are worth a total of ₹174.8b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Exide Industries boasts net cash, so it's fair to say it does not have a heavy debt load!

And we also note warmly that Exide Industries grew its EBIT by 13% last year, making its debt load easier to handle. There's no doubt that we learn most about debt from the balance sheet. But it is Exide Industries's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Exide Industries 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. Looking at the most recent three years, Exide Industries recorded free cash flow of 31% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

We could understand if investors are concerned about Exide Industries's liabilities, but we can be reassured by the fact it has has net cash of ₹4.64b. On top of that, it increased its EBIT by 13% in the last twelve months. So we are not troubled with Exide Industries's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. 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, 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.

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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.