Is Exide Industries (NSE:EXIDEIND) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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?

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. 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 2023 Exide Industries had debt of ₹5.88b, up from ₹5.20b in one year. But on the other hand it also has ₹7.35b in cash, leading to a ₹1.47b net cash position.

How Healthy 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 these obligations, it had cash of ₹7.35b as well as receivables valued at ₹13.6b due within 12 months. So its liabilities total ₹15.3b more than the combination of its cash and short-term receivables.

Given Exide Industries has a market capitalization of ₹220.2b, it's hard to believe these liabilities pose much 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!

Fortunately, Exide Industries grew its EBIT by 5.6% in the last year, making that debt load look even more manageable. 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 Exide Industries's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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 created free cash flow amounting to 6.7% of its EBIT, an uninspiring performance. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Exide Industries has ₹1.47b in net cash. And it also grew its EBIT by 5.6% over the last year. So we don't have any problem with Exide Industries's use of debt. 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. Case in point: We've spotted 1 warning sign for Exide Industries you should be aware of.

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.