Shriram Pistons & Rings (NSE:SHRIPISTON) Has A Rock Solid Balance Sheet

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.' 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 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.

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Shriram Pistons & Rings

What Is Shriram Pistons & Rings's Debt?

As you can see below, at the end of September 2023, Shriram Pistons & Rings had ₹3.33b of debt, up from ₹2.66b a year ago. Click the image for more detail. However, its balance sheet shows it holds ₹7.96b in cash, so it actually has ₹4.63b net cash.

A Look At Shriram Pistons & Rings' Liabilities

Zooming in on the latest balance sheet data, we can see that Shriram Pistons & Rings had liabilities of ₹6.92b due within 12 months and liabilities of ₹2.10b due beyond that. On the other hand, it had cash of ₹7.96b and ₹4.32b worth of receivables due within a year. So it actually has ₹3.27b more liquid assets than total liabilities.

This short term liquidity is a sign that Shriram Pistons & Rings could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Shriram Pistons & Rings has more cash than debt is arguably a good indication that it can manage its debt safely.

In addition to that, we're happy to report that Shriram Pistons & Rings has boosted its EBIT by 59%, thus reducing the spectre of future debt repayments. 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 Shriram Pistons & Rings'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. 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. During the last three years, Shriram Pistons & Rings produced sturdy free cash flow equating to 71% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Shriram Pistons & Rings has net cash of ₹4.63b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 59% over the last year. So is Shriram Pistons & Rings's debt a risk? It doesn't seem so to us. Over time, share prices tend to follow earnings per share, so if you're interested in Shriram Pistons & Rings, you may well want to click here to check an interactive graph of its earnings per share history.

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.