Is Asian Paints (NSE:ASIANPAINT) A Risky Investment?

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.' 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. Importantly, Asian Paints Limited (NSE:ASIANPAINT) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

Check out 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 as of March 2023 Asian Paints had ₹9.72b of debt, an increase on ₹7.76b, over one year. But it also has ₹35.4b in cash to offset that, meaning it has ₹25.7b net cash.

How Strong Is Asian Paints' Balance Sheet?

We can see from the most recent balance sheet that Asian Paints had liabilities of ₹79.0b falling due within a year, and liabilities of ₹14.6b due beyond that. On the other hand, it had cash of ₹35.4b and ₹46.4b worth of receivables due within a year. So its liabilities total ₹11.7b more than the combination of its cash and short-term receivables.

Having regard to Asian Paints' size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the ₹3.00t company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, Asian Paints also has more cash than debt, so we're pretty confident it can manage its debt safely.

In addition to that, we're happy to report that Asian Paints has boosted its EBIT by 35%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. 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 company can only pay off debt with cold hard cash, not accounting profits. Asian Paints 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. Over the most recent three years, Asian Paints recorded free cash flow worth 50% 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 ₹25.7b in net cash. And we liked the look of last year's 35% year-on-year EBIT growth. So is Asian Paints'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 Asian Paints's earnings per share history for free.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.