Kajaria Ceramics (NSE:KAJARIACER) Has A Rock Solid Balance Sheet

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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Kajaria Ceramics Limited (NSE:KAJARIACER) makes use of debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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 Kajaria Ceramics

How Much Debt Does Kajaria Ceramics Carry?

The image below, which you can click on for greater detail, shows that at September 2021 Kajaria Ceramics had debt of ₹905.5m, up from ₹690.9m in one year. But on the other hand it also has ₹5.65b in cash, leading to a ₹4.74b net cash position.

How Healthy Is Kajaria Ceramics' Balance Sheet?

The latest balance sheet data shows that Kajaria Ceramics had liabilities of ₹4.95b due within a year, and liabilities of ₹1.33b falling due after that. Offsetting this, it had ₹5.65b in cash and ₹4.28b in receivables that were due within 12 months. So it can boast ₹3.65b 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 it's very unlikely that the ₹195.6b company is short on cash, but still worth keeping an eye on the 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.

Better yet, Kajaria Ceramics grew its EBIT by 128% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Kajaria Ceramics can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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. 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 we empathize with investors who find debt concerning, you should keep in mind that Kajaria Ceramics has net cash of ₹4.74b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 128% over the last year. So we don't think Kajaria Ceramics's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 1 warning sign for Kajaria Ceramics that you should be aware of before investing here.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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