These 4 Measures Indicate That Shriram Pistons & Rings (NSE:SHRIPISTON) Is Using Debt Safely

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Shriram Pistons & Rings

What Is Shriram Pistons & Rings's Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2023 Shriram Pistons & Rings had ₹3.33b of debt, an increase on ₹1.57b, over one year. However, it does have ₹6.82b in cash offsetting this, leading to net cash of ₹3.49b.

How Healthy Is Shriram Pistons & Rings' Balance Sheet?

The latest balance sheet data shows that Shriram Pistons & Rings had liabilities of ₹5.99b due within a year, and liabilities of ₹2.34b falling due after that. On the other hand, it had cash of ₹6.82b and ₹4.18b worth of receivables due within a year. So it actually has ₹2.67b 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. Succinctly put, Shriram Pistons & Rings boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Shriram Pistons & Rings grew its EBIT by 76% over the last twelve months, and that growth will make it easier to handle its debt. 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 when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Shriram Pistons & Rings 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. Over the most recent three years, Shriram Pistons & Rings recorded free cash flow worth 70% 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 ₹3.49b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 76% over the last year. 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. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 2 warning signs for Shriram Pistons & Rings 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.