Is Kajaria Ceramics (NSE:KAJARIACER) A Risky Investment?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. Importantly, Kajaria Ceramics Limited (NSE:KAJARIACER) does carry debt. 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. 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. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Kajaria Ceramics

How Much Debt Does Kajaria Ceramics Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2021 Kajaria Ceramics had ₹1.18b of debt, an increase on ₹979.7m, over one year. But it also has ₹5.65b in cash to offset that, meaning it has ₹4.47b net cash.

How Strong Is Kajaria Ceramics' Balance Sheet?

According to the last reported balance sheet, Kajaria Ceramics had liabilities of ₹4.95b due within 12 months, and liabilities of ₹1.33b due beyond 12 months. On the other hand, it had cash of ₹5.65b and ₹4.28b worth of receivables due within a year. So it can boast ₹3.65b more liquid assets than total liabilities.

Having regard to Kajaria Ceramics' size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the ₹197.1b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, Kajaria Ceramics boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Kajaria Ceramics grew its EBIT by 75% over the last twelve months, and that growth will make it easier to handle its debt. 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'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. Kajaria Ceramics may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the most recent three years, Kajaria Ceramics recorded free cash flow worth 62% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

While it is always sensible to investigate a company's debt, in this case Kajaria Ceramics has ₹4.47b in net cash and a decent-looking balance sheet. And we liked the look of last year's 75% year-on-year EBIT growth. So we don't think Kajaria Ceramics's use of debt is risky. Another factor that would give us confidence in Kajaria Ceramics would be if insiders have been buying shares: if you're conscious of that signal too, you can find out instantly by clicking this link.

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.