Does Apollo Pipes (NSE:APOLLOPIPE) Have A Healthy Balance Sheet?

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.' 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 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. If things get really bad, the lenders can take control of the business. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Apollo Pipes

What Is Apollo Pipes's Net Debt?

As you can see below, Apollo Pipes had ₹522.5m of debt at March 2021, down from ₹900.7m a year prior. However, its balance sheet shows it holds ₹798.2m in cash, so it actually has ₹275.6m net cash.

How Strong Is Apollo Pipes' Balance Sheet?

The latest balance sheet data shows that Apollo Pipes had liabilities of ₹1.21b due within a year, and liabilities of ₹219.4m falling due after that. On the other hand, it had cash of ₹798.2m and ₹690.2m worth of receivables due within a year. So it actually has ₹60.5m more liquid assets than total liabilities.

Having regard to Apollo Pipes' size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the ₹14.3b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, Apollo Pipes boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Apollo Pipes grew its EBIT by 62% 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 it is Apollo Pipes's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs 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. Over the last three years, Apollo Pipes saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Apollo Pipes has net cash of ₹275.6m, as well as more liquid assets than liabilities. And we liked the look of last year's 62% year-on-year EBIT growth. So we don't have any problem with Apollo Pipes's use of debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for Apollo Pipes (1 can't be ignored) 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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