Is Shriram Pistons & Rings (NSE:SHRIPISTON) A Risky Investment?

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.' 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 can see that Shriram Pistons & Rings Limited (NSE:SHRIPISTON) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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. 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.

View our latest analysis for Shriram Pistons & Rings

What Is Shriram Pistons & Rings's Debt?

The image below, which you can click on for greater detail, shows that Shriram Pistons & Rings had debt of ₹496.5m at the end of September 2020, a reduction from ₹665.0m over a year. However, its balance sheet shows it holds ₹1.71b in cash, so it actually has ₹1.21b net cash.

How Strong Is Shriram Pistons & Rings' Balance Sheet?

According to the last reported balance sheet, Shriram Pistons & Rings had liabilities of ₹3.72b due within 12 months, and liabilities of ₹1.08b due beyond 12 months. Offsetting this, it had ₹1.71b in cash and ₹2.84b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹248.7m.

This state of affairs indicates that Shriram Pistons & Rings' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the ₹13.7b company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, Shriram Pistons & Rings boasts net cash, so it's fair to say it does not have a heavy debt load!

Shareholders should be aware that Shriram Pistons & Rings's EBIT was down 95% last year. If that earnings trend continues then paying off its debt will be about as easy as herding cats on to a roller coaster. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Shriram Pistons & Rings will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Shriram Pistons & Rings 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. In the last three years, Shriram Pistons & Rings's free cash flow amounted to 41% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing up

We could understand if investors are concerned about Shriram Pistons & Rings's liabilities, but we can be reassured by the fact it has has net cash of ₹1.21b. So while Shriram Pistons & Rings does not have a great balance sheet, it's certainly not too bad. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Consider for instance, the ever-present spectre of investment risk. We've identified 4 warning signs with Shriram Pistons & Rings (at least 1 which shouldn't be ignored) , and understanding them should be part of your investment process.

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. 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.
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