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

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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Asian Paints Limited (NSE:ASIANPAINT) does carry debt. But should shareholders be worried about its use of debt?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. 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?

The image below, which you can click on for greater detail, shows that at September 2023 Asian Paints had debt of ₹11.0b, up from ₹9.96b in one year. However, it does have ₹40.0b in cash offsetting this, leading to net cash of ₹29.0b.

A Look At Asian Paints' Liabilities

We can see from the most recent balance sheet that Asian Paints had liabilities of ₹83.7b falling due within a year, and liabilities of ₹18.7b due beyond that. On the other hand, it had cash of ₹40.0b and ₹44.5b worth of receivables due within a year. So its liabilities total ₹18.0b 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!

On top of that, Asian Paints grew its EBIT by 32% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. 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. 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. During the last three years, Asian Paints produced sturdy free cash flow equating to 51% of its EBIT, about what we'd expect. 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 ₹29.0b in net cash. And it impressed us with its EBIT growth of 32% over the last year. So we don't think Asian Paints's use of debt is risky. 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.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.