K.P.R. Mill (NSE:KPRMILL) Seems To Use Debt Quite Sensibly

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. We can see that K.P.R. Mill Limited (NSE:KPRMILL) does use debt in its business. But the real question is whether this debt is making the company risky.

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, 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.

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

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

As you can see below, K.P.R. Mill had ₹3.92b of debt at September 2024, down from ₹8.43b a year prior. However, it does have ₹7.54b in cash offsetting this, leading to net cash of ₹3.62b.

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

We can see from the most recent balance sheet that K.P.R. Mill had liabilities of ₹5.55b falling due within a year, and liabilities of ₹2.76b due beyond that. On the other hand, it had cash of ₹7.54b and ₹5.55b worth of receivables due within a year. So it can boast ₹4.78b more liquid assets than total liabilities.

This state of affairs indicates that K.P.R. Mill's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the ₹385.7b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, K.P.R. Mill boasts net cash, so it's fair to say it does not have a heavy debt load!

K.P.R. Mill's EBIT was pretty flat over the last year, but that shouldn't be an issue given the it doesn't have a lot of debt. 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 K.P.R. Mill 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 company can only pay off debt with cold hard cash, not accounting profits. K.P.R. Mill 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, K.P.R. Mill recorded free cash flow of 30% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While it is always sensible to investigate a company's debt, in this case K.P.R. Mill has ₹3.62b in net cash and a decent-looking balance sheet. So we don't have any problem with K.P.R. Mill's use of debt. 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. For example, we've discovered 1 warning sign for K.P.R. Mill that you should be aware of before investing here.

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.