Here's Why KEI Industries (NSE:KEI) Can Manage Its Debt Responsibly

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. Importantly, KEI Industries Limited (NSE:KEI) does carry 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. 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 step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for KEI Industries

How Much Debt Does KEI Industries Carry?

As you can see below, KEI Industries had ₹1.59b of debt at September 2022, down from ₹3.13b a year prior. But it also has ₹4.17b in cash to offset that, meaning it has ₹2.57b net cash.

How Strong Is KEI Industries' Balance Sheet?

The latest balance sheet data shows that KEI Industries had liabilities of ₹8.79b due within a year, and liabilities of ₹609.3m falling due after that. On the other hand, it had cash of ₹4.17b and ₹10.9b worth of receivables due within a year. So it actually has ₹5.67b more liquid assets than total liabilities.

This surplus suggests that KEI Industries has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that KEI Industries has more cash than debt is arguably a good indication that it can manage its debt safely.

Another good sign is that KEI Industries has been able to increase its EBIT by 26% in twelve months, making it easier to pay down 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 KEI Industries'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 KEI Industries 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. Looking at the most recent three years, KEI Industries recorded free cash flow of 36% of its EBIT, which is weaker 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 KEI Industries has net cash of ₹2.57b, as well as more liquid assets than liabilities. And we liked the look of last year's 26% year-on-year EBIT growth. So is KEI Industries's debt a risk? It doesn't seem so to us. We'd be motivated to research the stock further if we found out that KEI Industries insiders have bought shares recently. If you would too, then you're in luck, since today we're sharing our list of reported insider transactions for free.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.