Is K.P.R. Mill (NSE:KPRMILL) Using Too Much Debt?

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. Importantly, K.P.R. Mill Limited (NSE:KPRMILL) does carry debt. But should shareholders be worried about its use of debt?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for K.P.R. Mill

What Is K.P.R. Mill's Debt?

As you can see below, at the end of September 2021, K.P.R. Mill had ₹8.26b of debt, up from ₹3.56b a year ago. Click the image for more detail. But it also has ₹8.39b in cash to offset that, meaning it has ₹130.4m net cash.

How Strong Is K.P.R. Mill's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that K.P.R. Mill had liabilities of ₹6.48b due within 12 months and liabilities of ₹5.04b due beyond that. Offsetting this, it had ₹8.39b in cash and ₹4.65b in receivables that were due within 12 months. So it actually has ₹1.53b more liquid assets than total liabilities.

Having regard to K.P.R. Mill's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the ₹221.7b company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that K.P.R. Mill has more cash than debt is arguably a good indication that it can manage its debt safely.

In addition to that, we're happy to report that K.P.R. Mill has boosted its EBIT by 90%, thus reducing the spectre of future debt repayments. 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 K.P.R. Mill 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While K.P.R. Mill 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. In the last three years, K.P.R. Mill's free cash flow amounted to 49% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that K.P.R. Mill has net cash of ₹130.4m, as well as more liquid assets than liabilities. And we liked the look of last year's 90% year-on-year EBIT growth. So is K.P.R. Mill's debt a risk? It doesn't seem so to us. Over time, share prices tend to follow earnings per share, so if you're interested in K.P.R. Mill, you may well want to click here to check an interactive graph of its earnings per share history.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.