Is APL Apollo Tubes (NSE:APLAPOLLO) Using Too Much Debt?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that APL Apollo Tubes Limited (NSE:APLAPOLLO) does use debt in its business. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for APL Apollo Tubes

What Is APL Apollo Tubes's Net Debt?

The image below, which you can click on for greater detail, shows that at March 2024 APL Apollo Tubes had debt of ₹11.2b, up from ₹8.73b in one year. However, it does have ₹12.3b in cash offsetting this, leading to net cash of ₹1.04b.

How Healthy Is APL Apollo Tubes' Balance Sheet?

We can see from the most recent balance sheet that APL Apollo Tubes had liabilities of ₹25.0b falling due within a year, and liabilities of ₹10.9b due beyond that. On the other hand, it had cash of ₹12.3b and ₹1.43b worth of receivables due within a year. So its liabilities total ₹22.1b more than the combination of its cash and short-term receivables.

Given APL Apollo Tubes has a market capitalization of ₹453.4b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, APL Apollo Tubes boasts net cash, so it's fair to say it does not have a heavy debt load!

Also good is that APL Apollo Tubes grew its EBIT at 15% over the last year, further increasing its ability to manage debt. 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 APL Apollo Tubes's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While APL Apollo Tubes 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, APL Apollo Tubes created free cash flow amounting to 11% of its EBIT, an uninspiring performance. That limp level of cash conversion undermines its ability to manage and pay down debt.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that APL Apollo Tubes has ₹1.04b in net cash. On top of that, it increased its EBIT by 15% in the last twelve months. So we don't have any problem with APL Apollo Tubes's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 1 warning sign for APL Apollo Tubes 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.