Asian Paints (NSE:ASIANPAINT) Has A Pretty Healthy Balance Sheet

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.' 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. As with many other companies Asian Paints Limited (NSE:ASIANPAINT) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Asian Paints

How Much Debt Does Asian Paints Carry?

You can click the graphic below for the historical numbers, but it shows that Asian Paints had ₹3.46b of debt in September 2020, down from ₹10.6b, one year before. But on the other hand it also has ₹31.9b in cash, leading to a ₹28.4b net cash position.

How Strong Is Asian Paints' Balance Sheet?

According to the last reported balance sheet, Asian Paints had liabilities of ₹47.3b due within 12 months, and liabilities of ₹12.0b due beyond 12 months. On the other hand, it had cash of ₹31.9b and ₹21.7b worth of receivables due within a year. So it has liabilities totalling ₹5.67b more than its cash and near-term receivables, combined.

This state of affairs indicates that Asian Paints' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the ₹2.29t company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, Asian Paints boasts net cash, so it's fair to say it does not have a heavy debt load!

Fortunately, Asian Paints grew its EBIT by 7.3% in the last year, making that debt load look even more manageable. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Asian Paints'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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Asian Paints 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. Over the most recent three years, Asian Paints recorded free cash flow worth 54% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Asian Paints has ₹28.4b in net cash. So we don't think Asian Paints's use of debt is risky. Of course, we wouldn't say no to the extra confidence that we'd gain if we knew that Asian Paints insiders have been buying shares: if you're on the same wavelength, you can find out if insiders are buying by clicking this link.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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