These 4 Measures Indicate That Kajaria Ceramics (NSE:KAJARIACER) Is Using Debt Reasonably Well

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.' 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. As with many other companies Kajaria Ceramics Limited (NSE:KAJARIACER) makes use of debt. But should shareholders be worried about its use of debt?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. 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

What Is Kajaria Ceramics's Net Debt?

The image below, which you can click on for greater detail, shows that Kajaria Ceramics had debt of ₹1.71b at the end of March 2024, a reduction from ₹2.09b over a year. However, its balance sheet shows it holds ₹5.14b in cash, so it actually has ₹3.44b net cash.

How Strong Is Kajaria Ceramics' Balance Sheet?

The latest balance sheet data shows that Kajaria Ceramics had liabilities of ₹6.67b due within a year, and liabilities of ₹2.01b falling due after that. On the other hand, it had cash of ₹5.14b and ₹6.79b worth of receivables due within a year. So it can boast ₹3.26b 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 while it's hard to imagine that the ₹204.1b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Kajaria Ceramics boasts net cash, so it's fair to say it does not have a heavy debt load!

And we also note warmly that Kajaria Ceramics grew its EBIT by 20% 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 ultimately the future profitability of the business will decide if Kajaria Ceramics 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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. 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 ₹3.44b, as well as more liquid assets than liabilities. And we liked the look of last year's 20% year-on-year EBIT growth. 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. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 1 warning sign we've spotted with Kajaria Ceramics .

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.

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