Does Apollo Pipes (NSE:APOLLOPIPE) Have A Healthy 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. Importantly, Apollo Pipes Limited (NSE:APOLLOPIPE) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Apollo Pipes

How Much Debt Does Apollo Pipes Carry?

As you can see below, at the end of September 2020, Apollo Pipes had ₹284.6m of debt, up from ₹255.7m a year ago. Click the image for more detail. However, it does have ₹796.0m in cash offsetting this, leading to net cash of ₹511.4m.

How Healthy Is Apollo Pipes's Balance Sheet?

We can see from the most recent balance sheet that Apollo Pipes had liabilities of ₹827.2m falling due within a year, and liabilities of ₹273.2m due beyond that. On the other hand, it had cash of ₹796.0m and ₹585.6m worth of receivables due within a year. So it can boast ₹281.1m 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. Simply put, the fact that Apollo Pipes has more cash than debt is arguably a good indication that it can manage its debt safely.

But the bad news is that Apollo Pipes has seen its EBIT plunge 11% in the last twelve months. If that rate of decline in earnings continues, the company could find itself in a tight spot. 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Apollo Pipes 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, Apollo Pipes burned a lot of cash. 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 ₹511.4m in net cash and a decent-looking balance sheet. So we don't have any problem with Apollo Pipes'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. For example, we've discovered 3 warning signs for Apollo Pipes (1 is significant!) that you should be aware of before investing here.

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. 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.
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