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

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Page Industries Limited (NSE:PAGEIND) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Page Industries

What Is Page Industries's Debt?

You can click the graphic below for the historical numbers, but it shows that Page Industries had ₹1.14b of debt in September 2021, down from ₹1.43b, one year before. However, it does have ₹5.38b in cash offsetting this, leading to net cash of ₹4.24b.

A Look At Page Industries' Liabilities

The latest balance sheet data shows that Page Industries had liabilities of ₹8.29b due within a year, and liabilities of ₹894.5m falling due after that. On the other hand, it had cash of ₹5.38b and ₹1.28b worth of receivables due within a year. So it has liabilities totalling ₹2.53b more than its cash and near-term receivables, combined.

Having regard to Page Industries' size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the ₹457.3b 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.

In addition to that, we're happy to report that Page Industries has boosted its EBIT by 79%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Page Industries's ability to maintain a healthy balance sheet going forward. 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. 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. During the last three years, Page Industries generated free cash flow amounting to a very robust 95% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Page Industries has ₹4.24b in net cash. The cherry on top was that in converted 95% of that EBIT to free cash flow, bringing in ₹5.4b. So we don't think Page Industries's use of debt is risky. 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. Be aware that Page Industries is showing 2 warning signs in our investment analysis , you should know about...

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.