Here's Why Prince Pipes and Fittings (NSE:PRINCEPIPE) Can Manage Its Debt Responsibly

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 Prince Pipes and Fittings Limited (NSE:PRINCEPIPE) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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.

Check out our latest analysis for Prince Pipes and Fittings

What Is Prince Pipes and Fittings's Net Debt?

As you can see below, Prince Pipes and Fittings had ₹589.6m of debt at September 2023, down from ₹1.40b a year prior. But it also has ₹2.32b in cash to offset that, meaning it has ₹1.73b net cash.

A Look At Prince Pipes and Fittings' Liabilities

Zooming in on the latest balance sheet data, we can see that Prince Pipes and Fittings had liabilities of ₹4.22b due within 12 months and liabilities of ₹397.4m due beyond that. Offsetting these obligations, it had cash of ₹2.32b as well as receivables valued at ₹4.18b due within 12 months. So it can boast ₹1.89b more liquid assets than total liabilities.

This surplus suggests that Prince Pipes and Fittings has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Prince Pipes and Fittings boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Prince Pipes and Fittings grew its EBIT by 68% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Prince Pipes and Fittings can strengthen its balance sheet over time. 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. Prince Pipes and Fittings 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. Looking at the most recent three years, Prince Pipes and Fittings recorded free cash flow of 23% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Prince Pipes and Fittings has ₹1.73b in net cash and a decent-looking balance sheet. And we liked the look of last year's 68% year-on-year EBIT growth. So we don't think Prince Pipes and Fittings's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in Prince Pipes and Fittings, you may well want to click here to check an interactive graph of its earnings per share history.

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.