We Think Finolex Cables (NSE:FINCABLES) Can Manage Its Debt With Ease

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Finolex Cables Limited (NSE:FINCABLES) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, 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.

Check out our latest analysis for Finolex Cables

What Is Finolex Cables's Net Debt?

As you can see below, at the end of September 2023, Finolex Cables had ₹191.3m of debt, up from ₹109.4m a year ago. Click the image for more detail. However, it does have ₹25.7b in cash offsetting this, leading to net cash of ₹25.6b.

How Healthy Is Finolex Cables' Balance Sheet?

According to the last reported balance sheet, Finolex Cables had liabilities of ₹4.26b due within 12 months, and liabilities of ₹3.12b due beyond 12 months. Offsetting this, it had ₹25.7b in cash and ₹1.89b in receivables that were due within 12 months. So it can boast ₹20.3b more liquid assets than total liabilities.

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

And we also note warmly that Finolex Cables grew its EBIT by 20% last year, making its debt load easier to handle. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Finolex Cables can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Finolex Cables 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, Finolex Cables produced sturdy free cash flow equating to 70% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Finolex Cables has net cash of ₹25.6b, as well as more liquid assets than liabilities. The cherry on top was that in converted 70% of that EBIT to free cash flow, bringing in ₹3.7b. So is Finolex Cables's debt a risk? It doesn't seem so to us. Over time, share prices tend to follow earnings per share, so if you're interested in Finolex Cables, you may well want to click here to check an interactive graph of its earnings per share history.

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.