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

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. Importantly, Whirlpool of India Limited (NSE:WHIRLPOOL) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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 Whirlpool of India

What Is Whirlpool of India's Debt?

As you can see below, at the end of September 2024, Whirlpool of India had ₹2.31b of debt, up from ₹1.55b a year ago. Click the image for more detail. But it also has ₹24.5b in cash to offset that, meaning it has ₹22.1b net cash.

How Healthy Is Whirlpool of India's Balance Sheet?

We can see from the most recent balance sheet that Whirlpool of India had liabilities of ₹17.5b falling due within a year, and liabilities of ₹5.46b due beyond that. On the other hand, it had cash of ₹24.5b and ₹2.45b worth of receivables due within a year. So it can boast ₹3.93b more liquid assets than total liabilities.

This short term liquidity is a sign that Whirlpool of India could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Whirlpool of India has more cash than debt is arguably a good indication that it can manage its debt safely.

In addition to that, we're happy to report that Whirlpool of India has boosted its EBIT by 62%, 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 Whirlpool of India'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. Whirlpool of India 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. Happily for any shareholders, Whirlpool of India actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Whirlpool of India has net cash of ₹22.1b, as well as more liquid assets than liabilities. The cherry on top was that in converted 194% of that EBIT to free cash flow, bringing in ₹8.3b. So is Whirlpool of India's debt a risk? It doesn't seem so to us. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Whirlpool of India's earnings per share history for free.

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.