We Think Asian Paints (NSE:ASIANPAINT) Can Stay On Top Of Its Debt

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. As with many other companies Asian Paints Limited (NSE:ASIANPAINT) makes use of debt. But the more important question is: how much risk is that debt creating?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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 Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Asian Paints had ₹24.7b of debt, an increase on ₹19.3b, over one year. However, its balance sheet shows it holds ₹54.3b in cash, so it actually has ₹29.6b net cash.

How Healthy Is Asian Paints' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Asian Paints had liabilities of ₹85.0b due within 12 months and liabilities of ₹20.0b due beyond that. Offsetting this, it had ₹54.3b in cash and ₹53.6b in receivables that were due within 12 months. So it can boast ₹2.88b more liquid assets than total liabilities.

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 ₹3.14t company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, 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 4.1% 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 ultimately the future profitability of the business will decide if Asian Paints can strengthen its balance sheet over time. 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 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. During the last three years, Asian Paints produced sturdy free cash flow equating to 52% 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 investigate a company's debt, in this case Asian Paints has ₹29.6b in net cash and a decent-looking balance sheet. 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.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.