Is Berger Paints India (NSE:BERGEPAINT) Using Too Much Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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 Berger Paints India Limited (NSE:BERGEPAINT) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Berger Paints India

What Is Berger Paints India's Debt?

You can click the graphic below for the historical numbers, but it shows that Berger Paints India had ₹2.05b of debt in March 2024, down from ₹7.68b, one year before. However, it does have ₹5.37b in cash offsetting this, leading to net cash of ₹3.31b.

A Look At Berger Paints India's Liabilities

The latest balance sheet data shows that Berger Paints India had liabilities of ₹23.6b due within a year, and liabilities of ₹6.17b falling due after that. Offsetting this, it had ₹5.37b in cash and ₹13.5b in receivables that were due within 12 months. So its liabilities total ₹11.0b more than the combination of its cash and short-term receivables.

This state of affairs indicates that Berger Paints India's 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 ₹568.6b company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, Berger Paints India boasts net cash, so it's fair to say it does not have a heavy debt load!

Also positive, Berger Paints India grew its EBIT by 22% in the last year, and that should make it easier to pay down debt, going forward. When analysing debt levels, the balance sheet is the obvious place to start. 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. While Berger Paints India 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. In the last three years, Berger Paints India's free cash flow amounted to 34% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Berger Paints India has ₹3.31b in net cash. And we liked the look of last year's 22% year-on-year EBIT growth. So is Berger Paints India's debt a risk? It doesn't seem so to us. We'd be motivated to research the stock further if we found out that Berger Paints India insiders have bought shares recently. If you would too, then you're in luck, since today we're sharing our list of reported insider transactions for free.

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.