These 4 Measures Indicate That Page Industries (NSE:PAGEIND) Is Using Debt Reasonably Well

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Page Industries Limited (NSE:PAGEIND) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Page Industries

What Is Page Industries's Net Debt?

As you can see below, Page Industries had ₹216.4m of debt at September 2020, down from ₹1.71b a year prior. But on the other hand it also has ₹4.13b in cash, leading to a ₹3.92b net cash position.

A Look At Page Industries' Liabilities

The latest balance sheet data shows that Page Industries had liabilities of ₹6.24b due within a year, and liabilities of ₹1.15b falling due after that. Offsetting these obligations, it had cash of ₹4.13b as well as receivables valued at ₹951.3m due within 12 months. So its liabilities total ₹2.31b more than the combination of its cash and short-term receivables.

This state of affairs indicates that Page Industries' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the ₹335.1b company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, Page Industries also has more cash than debt, so we're pretty confident it can manage its debt safely.

The modesty of its debt load may become crucial for Page Industries if management cannot prevent a repeat of the 35% cut to EBIT over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Page Industries's earnings that will influence how the balance sheet holds up in the future. 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. Page Industries 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. Over the most recent three years, Page Industries recorded free cash flow worth 73% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Page Industries has ₹3.92b in net cash. And it impressed us with free cash flow of ₹5.4b, being 73% of its EBIT. So we are not troubled with Page Industries's debt use. 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. Case in point: We've spotted 1 warning sign for Page Industries 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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