Does Praj Industries (NSE:PRAJIND) Have A Healthy Balance Sheet?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Praj Industries Limited (NSE:PRAJIND) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. 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 Praj Industries

What Is Praj Industries's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2021 Praj Industries had debt of ₹157.4m, up from ₹130.8m in one year. But it also has ₹4.39b in cash to offset that, meaning it has ₹4.24b net cash.

How Healthy Is Praj Industries' Balance Sheet?

According to the last reported balance sheet, Praj Industries had liabilities of ₹8.68b due within 12 months, and liabilities of ₹298.5m due beyond 12 months. Offsetting this, it had ₹4.39b in cash and ₹4.68b in receivables that were due within 12 months. So these liquid assets roughly match the total liabilities.

Having regard to Praj Industries' size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the ₹68.4b company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that Praj Industries has more cash than debt is arguably a good indication that it can manage its debt safely.

Better yet, Praj Industries grew its EBIT by 240% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Praj 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Praj 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. Happily for any shareholders, Praj Industries actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Praj Industries has net cash of ₹4.24b, as well as more liquid assets than liabilities. The cherry on top was that in converted 108% of that EBIT to free cash flow, bringing in ₹1.5b. So we don't think Praj Industries's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for Praj Industries that you should be aware of.

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.