Carborundum Universal (NSE:CARBORUNIV) Could Easily Take On More Debt

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 Carborundum Universal Limited (NSE:CARBORUNIV) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Carborundum Universal

What Is Carborundum Universal's Net Debt?

As you can see below, Carborundum Universal had ₹642.1m of debt at March 2021, down from ₹703.4m a year prior. However, its balance sheet shows it holds ₹6.87b in cash, so it actually has ₹6.23b net cash.

How Healthy Is Carborundum Universal's Balance Sheet?

According to the last reported balance sheet, Carborundum Universal had liabilities of ₹4.66b due within 12 months, and liabilities of ₹445.3m due beyond 12 months. Offsetting this, it had ₹6.87b in cash and ₹4.84b in receivables that were due within 12 months. So it actually has ₹6.61b more liquid assets than total liabilities.

This surplus suggests that Carborundum Universal has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Carborundum Universal boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Carborundum Universal has boosted its EBIT by 80%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Carborundum Universal's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Carborundum Universal 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 most recent three years, Carborundum Universal recorded free cash flow worth 80% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing up

While it is always sensible to investigate a company's debt, in this case Carborundum Universal has ₹6.23b in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 80% over the last year. So we don't think Carborundum Universal's use of debt is risky. 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 3 warning signs for Carborundum Universal that you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.
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