Does Kajaria Ceramics (NSE:KAJARIACER) Have A Healthy Balance Sheet?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Kajaria Ceramics Limited (NSE:KAJARIACER) does use debt in its business. But the more important question is: how much risk is that debt creating?

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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Kajaria Ceramics

What Is Kajaria Ceramics's Debt?

The image below, which you can click on for greater detail, shows that Kajaria Ceramics had debt of ₹2.39b at the end of March 2024, a reduction from ₹2.50b over a year. However, it does have ₹5.14b in cash offsetting this, leading to net cash of ₹2.75b.

A Look At Kajaria Ceramics' Liabilities

Zooming in on the latest balance sheet data, we can see that Kajaria Ceramics had liabilities of ₹6.67b due within 12 months and liabilities of ₹2.01b due beyond that. On the other hand, it had cash of ₹5.14b and ₹6.80b worth of receivables due within a year. So it can boast ₹3.27b more liquid assets than total liabilities.

This state of affairs indicates that Kajaria Ceramics' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the ₹235.5b company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that Kajaria Ceramics has more cash than debt is arguably a good indication that it can manage its debt safely.

And we also note warmly that Kajaria Ceramics grew its EBIT by 13% last year, making its debt load easier to handle. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Kajaria Ceramics'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 Kajaria Ceramics 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. In the last three years, Kajaria Ceramics's free cash flow amounted to 35% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Kajaria Ceramics has net cash of ₹2.75b, as well as more liquid assets than liabilities. On top of that, it increased its EBIT by 13% in the last twelve months. So we are not troubled with Kajaria Ceramics's debt use. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Kajaria Ceramics you should know about.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.