We Think Praj Industries (NSE:PRAJIND) Can Manage Its Debt With Ease

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Praj Industries Limited (NSE:PRAJIND) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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.

See our latest analysis for Praj Industries

How Much Debt Does Praj Industries Carry?

The image below, which you can click on for greater detail, shows that at March 2021 Praj Industries had debt of ₹176.6m, up from none in one year. However, it does have ₹4.26b in cash offsetting this, leading to net cash of ₹4.09b.

A Look At Praj Industries' Liabilities

We can see from the most recent balance sheet that Praj Industries had liabilities of ₹7.64b falling due within a year, and liabilities of ₹270.2m due beyond that. On the other hand, it had cash of ₹4.26b and ₹6.02b worth of receivables due within a year. So it actually has ₹2.37b more liquid assets than total liabilities.

This surplus suggests that Praj Industries has a conservative balance sheet, and could probably eliminate its debt without much difficulty. 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 286% last year, which is an impressive improvement. That boost will make it even 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 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs 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. Happily for any shareholders, Praj Industries actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

While it is always sensible to investigate a company's debt, in this case Praj Industries has ₹4.09b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of ₹2.2b, being 116% of its EBIT. So is Praj Industries's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. We've identified 1 warning sign with Praj Industries , and understanding them should be part of your investment process.

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.
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