Here's Why Berger Paints India (NSE:BERGEPAINT) Can Manage Its Debt Responsibly

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies Berger Paints India Limited (NSE:BERGEPAINT) makes use of debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. 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.

View our latest analysis for Berger Paints India

What Is Berger Paints India's Debt?

The image below, which you can click on for greater detail, shows that Berger Paints India had debt of ₹7.97b at the end of September 2024, a reduction from ₹11.5b over a year. On the flip side, it has ₹5.30b in cash leading to net debt of about ₹2.67b.

How Strong Is Berger Paints India's Balance Sheet?

According to the last reported balance sheet, Berger Paints India had liabilities of ₹26.7b due within 12 months, and liabilities of ₹6.14b due beyond 12 months. On the other hand, it had cash of ₹5.30b and ₹16.8b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹10.7b.

Having regard to Berger Paints India's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the ₹583.2b company is struggling for cash, we still think it's worth monitoring its balance sheet. Carrying virtually no net debt, Berger Paints India has a very light debt load indeed.

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Berger Paints India has a low net debt to EBITDA ratio of only 0.16. And its EBIT covers its interest expense a whopping 35.9 times over. So you could argue it is no more threatened by its debt than an elephant is by a mouse. But the other side of the story is that Berger Paints India saw its EBIT decline by 9.6% over the last year. That sort of decline, if sustained, will obviously make debt harder to handle. 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 Berger Paints India 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 company can only pay off debt with cold hard cash, not accounting profits. So the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. Over the most recent three years, Berger Paints India recorded free cash flow worth 55% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Our View

The good news is that Berger Paints India's demonstrated ability to cover its interest expense with its EBIT delights us like a fluffy puppy does a toddler. But truth be told we feel its EBIT growth rate does undermine this impression a bit. All these things considered, it appears that Berger Paints India can comfortably handle its current debt levels. Of course, while this leverage can enhance returns on equity, it does bring more risk, so it's worth keeping an eye on this one. Of course, we wouldn't say no to the extra confidence that we'd gain if we knew that Berger Paints India insiders have been buying shares: if you're on the same wavelength, you can find out if insiders are buying by clicking this link.

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.