Prakash Pipes (NSE:PPL) Could Easily Take On More Debt

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Prakash Pipes Limited (NSE:PPL) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, 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.

View our latest analysis for Prakash Pipes

How Much Debt Does Prakash Pipes Carry?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Prakash Pipes had ₹401.8m of debt, an increase on ₹95.8m, over one year. But it also has ₹2.58b in cash to offset that, meaning it has ₹2.18b net cash.

How Healthy Is Prakash Pipes' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Prakash Pipes had liabilities of ₹1.15b due within 12 months and liabilities of ₹126.2m due beyond that. Offsetting these obligations, it had cash of ₹2.58b as well as receivables valued at ₹751.2m due within 12 months. So it can boast ₹2.06b more liquid assets than total liabilities.

This excess liquidity suggests that Prakash Pipes is taking a careful approach to debt. Due to its strong net asset position, it is not likely to face issues with its lenders. Simply put, the fact that Prakash Pipes has more cash than debt is arguably a good indication that it can manage its debt safely.

In addition to that, we're happy to report that Prakash Pipes has boosted its EBIT by 38%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Prakash Pipes will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Prakash Pipes 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. During the last three years, Prakash Pipes produced sturdy free cash flow equating to 64% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Prakash Pipes has net cash of ₹2.18b, as well as more liquid assets than liabilities. And we liked the look of last year's 38% year-on-year EBIT growth. So we don't think Prakash Pipes's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. We've identified 1 warning sign with Prakash Pipes , and understanding them should be part of your investment process.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com