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

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. As with many other companies KEI Industries Limited (NSE:KEI) makes use of debt. But is this debt a concern to shareholders?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for KEI Industries

How Much Debt Does KEI Industries Carry?

The chart below, which you can click on for greater detail, shows that KEI Industries had ₹1.66b in debt in March 2024; about the same as the year before. However, it does have ₹7.00b in cash offsetting this, leading to net cash of ₹5.34b.

How Healthy Is KEI Industries' Balance Sheet?

We can see from the most recent balance sheet that KEI Industries had liabilities of ₹14.3b falling due within a year, and liabilities of ₹768.5m due beyond that. Offsetting these obligations, it had cash of ₹7.00b as well as receivables valued at ₹15.8b due within 12 months. So it actually has ₹7.76b more liquid assets than total liabilities.

This state of affairs indicates that KEI Industries' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the ₹406.8b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, KEI Industries boasts net cash, so it's fair to say it does not have a heavy debt load!

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. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs 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 40% 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 ₹5.34b, as well as more liquid assets than liabilities. 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. Of course, we wouldn't say no to the extra confidence that we'd gain if we knew that KEI Industries insiders have been buying shares: if you're on the same wavelength, you can find out if insiders are buying by clicking this link.

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.