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

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 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. We can see that Apollo Pipes Limited (NSE:APOLLOPIPE) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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. 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

How Much Debt Does Apollo Pipes Carry?

As you can see below, Apollo Pipes had ₹386.6m of debt at March 2022, down from ₹628.8m a year prior. However, it does have ₹419.8m in cash offsetting this, leading to net cash of ₹33.2m.

How Healthy Is Apollo Pipes' Balance Sheet?

The latest balance sheet data shows that Apollo Pipes had liabilities of ₹1.26b due within a year, and liabilities of ₹121.6m falling due after that. Offsetting this, it had ₹419.8m in cash and ₹761.7m in receivables that were due within 12 months. So its liabilities total ₹203.8m more than the combination of its cash and short-term receivables.

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 ₹17.9b company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, Apollo Pipes also has more cash than debt, so we're pretty confident it can manage its debt safely.

Also good is that Apollo Pipes grew its EBIT at 20% over the last year, further increasing its ability to manage debt. 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. 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 it is always sensible to look at a company's total liabilities, it is very reassuring that Apollo Pipes has ₹33.2m in net cash. And we liked the look of last year's 20% year-on-year EBIT growth. 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. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Apollo Pipes you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.