Kajaria Ceramics (NSE:KAJARIACER) Seems To Use Debt Quite Sensibly

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. As with many other companies Kajaria Ceramics Limited (NSE:KAJARIACER) makes use of debt. But is this debt a concern to shareholders?

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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

Check out the opportunities and risks within the IN Building industry.

How Much Debt Does Kajaria Ceramics Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2022 Kajaria Ceramics had ₹1.87b of debt, an increase on ₹905.5m, over one year. However, its balance sheet shows it holds ₹3.38b in cash, so it actually has ₹1.51b net cash.

How Healthy Is Kajaria Ceramics' Balance Sheet?

We can see from the most recent balance sheet that Kajaria Ceramics had liabilities of ₹6.28b falling due within a year, and liabilities of ₹1.91b due beyond that. Offsetting this, it had ₹3.38b in cash and ₹5.55b in receivables that were due within 12 months. So it actually has ₹734.4m 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 ₹177.5b 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 the other hand, Kajaria Ceramics saw its EBIT drop by 4.1% in the last twelve months. That sort of decline, if sustained, will obviously make debt harder to handle. When analysing debt levels, the balance sheet is the obvious place to start. 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, 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 43% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While it is always sensible to investigate a company's debt, in this case Kajaria Ceramics has ₹1.51b in net cash and a decent-looking balance sheet. So we don't have any problem with Kajaria Ceramics's use of debt. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Kajaria Ceramics (of which 1 is a bit concerning!) you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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.