We Think Asian Paints (NSE:ASIANPAINT) Can Manage Its Debt With Ease

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 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. 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.

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. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Asian Paints

What Is Asian Paints's Net Debt?

As you can see below, at the end of September 2022, Asian Paints had ₹18.7b of debt, up from ₹14.0b a year ago. Click the image for more detail. But it also has ₹25.4b in cash to offset that, meaning it has ₹6.77b net cash.

A Look At Asian Paints' Liabilities

We can see from the most recent balance sheet that Asian Paints had liabilities of ₹84.2b falling due within a year, and liabilities of ₹12.9b due beyond that. Offsetting these obligations, it had cash of ₹25.4b as well as receivables valued at ₹40.7b due within 12 months. So it has liabilities totalling ₹30.9b more than its cash and near-term receivables, combined.

Having regard to Asian Paints' size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the ₹2.69t company is struggling for cash, we still think it's worth monitoring its 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.

Also positive, Asian Paints grew its EBIT by 30% in the last year, and that should make it easier to pay down debt, going forward. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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. In the last three years, Asian Paints's free cash flow amounted to 48% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

We could understand if investors are concerned about Asian Paints's liabilities, but we can be reassured by the fact it has has net cash of ₹6.77b. And it impressed us with its EBIT growth of 30% over the last year. So is Asian Paints's debt a risk? It doesn't seem so to us. Over time, share prices tend to follow earnings per share, so if you're interested in Asian Paints, you may well want to click here to check an interactive graph of its earnings per share history.

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.