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

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. Importantly, Page Industries Limited (NSE:PAGEIND) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. 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?

The image below, which you can click on for greater detail, shows that Page Industries had debt of ₹1.10b at the end of March 2022, a reduction from ₹1.27b over a year. However, it does have ₹2.80b in cash offsetting this, leading to net cash of ₹1.70b.

How Healthy Is Page Industries' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Page Industries had liabilities of ₹9.36b due within 12 months and liabilities of ₹819.6m due beyond that. Offsetting these obligations, it had cash of ₹2.80b as well as receivables valued at ₹1.70b due within 12 months. So its liabilities total ₹5.68b 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 ₹555.3b 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. The balance sheet is clearly the area to focus on when you are analysing debt. 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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 produced sturdy free cash flow equating to 74% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

We could understand if investors are concerned about Page Industries's liabilities, but we can be reassured by the fact it has has net cash of ₹1.70b. And it impressed us with its EBIT growth of 79% over the last year. So is Page Industries's debt a risk? It doesn't seem so to us. 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. For example - Page Industries has 2 warning signs we think you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.