These 4 Measures Indicate That Apollo Pipes (NSE:APOLLOPIPE) Is Using Debt Reasonably Well

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Apollo Pipes Limited (NSE:APOLLOPIPE) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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, 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.

Check out our latest analysis for Apollo Pipes

What Is Apollo Pipes's Debt?

You can click the graphic below for the historical numbers, but it shows that Apollo Pipes had ₹237.1m of debt in September 2021, down from ₹284.6m, one year before. But on the other hand it also has ₹408.5m in cash, leading to a ₹171.5m net cash position.

A Look At Apollo Pipes' Liabilities

Zooming in on the latest balance sheet data, we can see that Apollo Pipes had liabilities of ₹879.9m due within 12 months and liabilities of ₹162.5m due beyond that. On the other hand, it had cash of ₹408.5m and ₹926.1m worth of receivables due within a year. So it actually has ₹292.2m 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 while it's hard to imagine that the ₹20.7b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Apollo Pipes boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that Apollo Pipes grew its EBIT by 146% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. The balance sheet is clearly the area to focus on when you are analysing debt. 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. 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. During the last three years, Apollo Pipes burned a lot of cash. 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 ₹171.5m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 146% over the last year. So we don't have any problem with Apollo Pipes's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 2 warning signs for Apollo Pipes (1 shouldn't be ignored!) that you should be aware of before investing here.

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.

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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.