KEI Industries (NSE:KEI) 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. We can see that KEI Industries Limited (NSE:KEI) does use debt in its business. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for KEI Industries

How Much Debt Does KEI Industries Carry?

As you can see below, KEI Industries had ₹1.86b of debt at September 2022, down from ₹3.38b a year prior. However, it does have ₹4.17b in cash offsetting this, leading to net cash of ₹2.31b.

A Look At KEI Industries' Liabilities

We can see from the most recent balance sheet that KEI Industries had liabilities of ₹8.79b falling due within a year, and liabilities of ₹609.3m due beyond that. Offsetting these obligations, it had cash of ₹4.17b as well as receivables valued at ₹10.9b due within 12 months. So it actually has ₹5.67b more liquid assets than total liabilities.

This short term liquidity is a sign that KEI Industries could probably pay off its debt with ease, as its balance sheet is far from stretched. 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 23% 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. KEI Industries 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. Looking at the most recent three years, KEI Industries recorded free cash flow of 46% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case KEI Industries has ₹2.31b in net cash and a decent-looking balance sheet. And we liked the look of last year's 23% year-on-year EBIT growth. So is KEI Industries's debt a risk? It doesn't seem so to us. 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 1 warning sign for KEI Industries you should know about.

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.