Apollo Pipes (NSE:APOLLOPIPE) Has A Somewhat Strained Balance Sheet

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 note that Apollo Pipes Limited (NSE:APOLLOPIPE) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Apollo Pipes

What Is Apollo Pipes's Debt?

As you can see below, Apollo Pipes had ₹775.9m of debt at March 2020, down from ₹1.19b a year prior. However, it does have ₹1.36b in cash offsetting this, leading to net cash of ₹585.0m.

A Look At Apollo Pipes's Liabilities

According to the last reported balance sheet, Apollo Pipes had liabilities of ₹1.42b due within 12 months, and liabilities of ₹331.7m due beyond 12 months. Offsetting this, it had ₹1.36b in cash and ₹596.3m in receivables that were due within 12 months. So it actually has ₹201.0m more liquid assets than total liabilities.

This short term liquidity is a sign that Apollo Pipes could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Apollo Pipes boasts net cash, so it's fair to say it does not have a heavy debt load!

Importantly, Apollo Pipes's EBIT fell a jaw-dropping 24% in the last twelve months. If that earnings trend continues then paying off its debt will be about as easy as herding cats on to a roller coaster. When analysing debt levels, the balance sheet is the obvious place to start. But it is Apollo Pipes's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Apollo Pipes 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 last three years, Apollo Pipes saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing up

While it is always sensible to investigate a company's debt, in this case Apollo Pipes has ₹585.0m in net cash and a decent-looking balance sheet. So while Apollo Pipes does not have a great balance sheet, it's certainly not too bad. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Take risks, for example - Apollo Pipes has 2 warning signs we think you should be aware of.

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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