Shriram Pistons & Rings (NSE:SHRIPISTON) Seems To Use Debt Rather Sparingly

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Shriram Pistons & Rings Limited (NSE:SHRIPISTON) does carry debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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 examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Shriram Pistons & Rings

What Is Shriram Pistons & Rings's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Shriram Pistons & Rings had ₹5.06b of debt, an increase on ₹3.33b, over one year. However, its balance sheet shows it holds ₹11.6b in cash, so it actually has ₹6.54b net cash.

How Strong Is Shriram Pistons & Rings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Shriram Pistons & Rings had liabilities of ₹8.56b due within 12 months and liabilities of ₹2.92b due beyond that. On the other hand, it had cash of ₹11.6b and ₹5.07b worth of receivables due within a year. So it actually has ₹5.18b more liquid assets than total liabilities.

This surplus suggests that Shriram Pistons & Rings has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Shriram Pistons & Rings boasts net cash, so it's fair to say it does not have a heavy debt load!

And we also note warmly that Shriram Pistons & Rings grew its EBIT by 13% last year, making its debt load easier to handle. The balance sheet is clearly the area to focus on when you are analysing debt. 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, 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. Over the most recent three years, Shriram Pistons & Rings recorded free cash flow worth 60% of its EBIT, which is around normal, given free cash flow excludes interest and tax. 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 ₹6.54b, as well as more liquid assets than liabilities. So is Shriram Pistons & Rings's debt a risk? It doesn't seem so to us. 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. For example, we've discovered 1 warning sign for Shriram Pistons & Rings that you should be aware of before investing here.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.