Is Apar Industries (NSE:APARINDS) Using Too Much Debt?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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, Apar Industries Limited (NSE:APARINDS) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Apar Industries

How Much Debt Does Apar Industries Carry?

You can click the graphic below for the historical numbers, but it shows that as of March 2023 Apar Industries had ₹3.04b of debt, an increase on ₹2.53b, over one year. But it also has ₹5.80b in cash to offset that, meaning it has ₹2.76b net cash.

A Look At Apar Industries' Liabilities

According to the last reported balance sheet, Apar Industries had liabilities of ₹57.3b due within 12 months, and liabilities of ₹2.54b due beyond 12 months. Offsetting this, it had ₹5.80b in cash and ₹32.0b in receivables that were due within 12 months. So its liabilities total ₹22.0b more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Apar Industries has a market capitalization of ₹101.1b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. While it does have liabilities worth noting, Apar Industries also has more cash than debt, so we're pretty confident it can manage its debt safely.

Pleasingly, Apar Industries is growing its EBIT faster than former Australian PM Bob Hawke downs a yard glass, boasting a 155% gain in the last twelve months. 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 Apar Industries'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. Apar Industries 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. Looking at the most recent three years, Apar Industries recorded free cash flow of 41% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While Apar Industries does have more liabilities than liquid assets, it also has net cash of ₹2.76b. And it impressed us with its EBIT growth of 155% over the last year. So we don't have any problem with Apar 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. Be aware that Apar Industries is showing 2 warning signs in our investment analysis , you should know about...

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.