Praj Industries (NSE:PRAJIND) 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.' 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. Importantly, Praj Industries Limited (NSE:PRAJIND) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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, 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 Praj Industries

What Is Praj Industries's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2023 Praj Industries had ₹375.7m of debt, an increase on ₹255.8m, over one year. But it also has ₹5.86b in cash to offset that, meaning it has ₹5.49b net cash.

A Look At Praj Industries' Liabilities

Zooming in on the latest balance sheet data, we can see that Praj Industries had liabilities of ₹14.3b due within 12 months and liabilities of ₹406.3m due beyond that. Offsetting these obligations, it had cash of ₹5.86b as well as receivables valued at ₹7.61b due within 12 months. So it has liabilities totalling ₹1.22b more than its cash and near-term receivables, combined.

Having regard to Praj Industries' size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the ₹97.7b company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, Praj Industries also has more cash than debt, so we're pretty confident it can manage its debt safely.

Also positive, Praj Industries grew its EBIT by 27% 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 ultimately the future profitability of the business will decide if Praj 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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. Over the most recent three years, Praj Industries recorded free cash flow worth 67% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

We could understand if investors are concerned about Praj Industries's liabilities, but we can be reassured by the fact it has has net cash of ₹5.49b. And it impressed us with its EBIT growth of 27% over the last year. 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. To that end, you should be aware of the 1 warning sign we've spotted with Praj Industries .

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.