KEI Industries (NSE:KEI) Seems To Use Debt Quite Sensibly

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.' 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. We note that KEI Industries Limited (NSE:KEI) does have debt on its balance sheet. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for KEI Industries

How Much Debt Does KEI Industries Carry?

As you can see below, KEI Industries had ₹1.35b of debt at March 2023, down from ₹3.31b a year prior. But on the other hand it also has ₹5.37b in cash, leading to a ₹4.02b net cash position.

How Healthy Is KEI Industries' Balance Sheet?

The latest balance sheet data shows that KEI Industries had liabilities of ₹11.2b due within a year, and liabilities of ₹634.4m falling due after that. Offsetting this, it had ₹5.37b in cash and ₹14.0b in receivables that were due within 12 months. So it can boast ₹7.52b 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.

Also positive, KEI Industries grew its EBIT by 22% in the last year, and that should make it easier to pay down debt, going forward. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if KEI Industries 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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. In the last three years, KEI Industries's free cash flow amounted to 45% of its EBIT, less 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 ₹4.02b in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 22% over the last year. So we don't think KEI Industries's use of debt is risky. 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.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.