Precision Wires India (NSE:PRECWIRE) Seems To Use Debt Quite Sensibly

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. We can see that Precision Wires India Ltd. (NSE:PRECWIRE) does use debt in its business. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 Precision Wires India

How Much Debt Does Precision Wires India Carry?

As you can see below, Precision Wires India had ₹127.7m of debt at September 2020, down from ₹456.5m a year prior. But it also has ₹462.6m in cash to offset that, meaning it has ₹334.9m net cash.

How Strong Is Precision Wires India's Balance Sheet?

We can see from the most recent balance sheet that Precision Wires India had liabilities of ₹2.97b falling due within a year, and liabilities of ₹165.9m due beyond that. On the other hand, it had cash of ₹462.6m and ₹2.83b worth of receivables due within a year. So it can boast ₹159.4m more liquid assets than total liabilities.

This surplus suggests that Precision Wires India has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Precision Wires India has more cash than debt is arguably a good indication that it can manage its debt safely.

Shareholders should be aware that Precision Wires India's EBIT was down 28% last year. If that decline continues then paying off debt will be harder than selling foie gras at a vegan convention. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Precision Wires India will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Precision Wires India 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. During the last three years, Precision Wires India produced sturdy free cash flow equating to 57% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing up

While it is always sensible to investigate a company's debt, in this case Precision Wires India has ₹334.9m in net cash and a decent-looking balance sheet. So we are not troubled with Precision Wires India's debt use. 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. For example - Precision Wires India has 2 warning signs we think 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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