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

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, Kajaria Ceramics Limited (NSE:KAJARIACER) does carry debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Kajaria Ceramics

What Is Kajaria Ceramics's Debt?

As you can see below, at the end of September 2024, Kajaria Ceramics had ₹1.70b of debt, up from ₹1.25b a year ago. Click the image for more detail. But it also has ₹4.45b in cash to offset that, meaning it has ₹2.75b net cash.

How Strong Is Kajaria Ceramics' Balance Sheet?

We can see from the most recent balance sheet that Kajaria Ceramics had liabilities of ₹7.15b falling due within a year, and liabilities of ₹2.34b due beyond that. Offsetting this, it had ₹4.45b in cash and ₹6.74b in receivables that were due within 12 months. So it can boast ₹1.70b 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 ₹181.5b 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.

On the other hand, Kajaria Ceramics saw its EBIT drop by 2.3% in the last twelve months. That sort of decline, if sustained, will obviously make debt harder to handle. There's no doubt that we learn most about debt from the balance sheet. 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 32% 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. So we are not troubled with Kajaria Ceramics's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. 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 .

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.

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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.