These 4 Measures Indicate That Whirlpool of India (NSE:WHIRLPOOL) Is Using Debt Reasonably Well

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. Importantly, Whirlpool of India Limited (NSE:WHIRLPOOL) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Whirlpool of India

How Much Debt Does Whirlpool of India Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2021 Whirlpool of India had ₹591.0m of debt, an increase on ₹146.0m, over one year. But on the other hand it also has ₹12.8b in cash, leading to a ₹12.2b net cash position.

How Healthy Is Whirlpool of India's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Whirlpool of India had liabilities of ₹15.3b due within 12 months and liabilities of ₹3.79b due beyond that. Offsetting these obligations, it had cash of ₹12.8b as well as receivables valued at ₹3.70b due within 12 months. So it has liabilities totalling ₹2.63b more than its cash and near-term receivables, combined.

This state of affairs indicates that Whirlpool of India'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 ₹202.1b company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, Whirlpool of India also has more cash than debt, so we're pretty confident it can manage its debt safely.

Fortunately, Whirlpool of India grew its EBIT by 4.6% in the last year, making that debt load look even more manageable. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Whirlpool of India'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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Whirlpool of India 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, Whirlpool of India created free cash flow amounting to 11% of its EBIT, an uninspiring performance. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing up

We could understand if investors are concerned about Whirlpool of India's liabilities, but we can be reassured by the fact it has has net cash of ₹12.2b. On top of that, it increased its EBIT by 4.6% in the last twelve months. So we are not troubled with Whirlpool of India's debt use. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Whirlpool of India is showing 1 warning sign in our investment analysis , you should know about...

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.