Here's Why Asian Paints (NSE:ASIANPAINT) Can Manage Its Debt Responsibly

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. We can see that Asian Paints Limited (NSE:ASIANPAINT) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

See our latest analysis for Asian Paints

How Much Debt Does Asian Paints Carry?

As you can see below, at the end of March 2022, Asian Paints had ₹15.9b of debt, up from ₹10.9b a year ago. Click the image for more detail. However, it does have ₹40.4b in cash offsetting this, leading to net cash of ₹24.5b.

How Healthy Is Asian Paints' Balance Sheet?

We can see from the most recent balance sheet that Asian Paints had liabilities of ₹75.7b falling due within a year, and liabilities of ₹12.1b due beyond that. On the other hand, it had cash of ₹40.4b and ₹43.7b worth of receivables due within a year. So its liabilities total ₹3.82b more than the combination of its cash and short-term receivables.

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 ₹3.14t 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 3.1% 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 ultimately the future profitability of the business will decide if Asian Paints can strengthen its balance sheet over time. 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. 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. In the last three years, Asian Paints's free cash flow amounted to 45% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Asian Paints has ₹24.5b in net cash. On top of that, it increased its EBIT by 3.1% in the last twelve months. So we are not troubled with Asian Paints's debt use. 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 - Asian Paints has 1 warning sign we think you should be aware of.

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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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.