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

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We can see that Berger Paints India Limited (NSE:BERGEPAINT) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. 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?

As you can see below, Berger Paints India had ₹2.51b of debt at September 2024, down from ₹6.93b a year prior. However, it does have ₹5.30b in cash offsetting this, leading to net cash of ₹2.79b.

How Healthy 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. Offsetting these obligations, it had cash of ₹5.30b as well as receivables valued at ₹16.8b due within 12 months. So its liabilities total ₹10.7b more than the combination of its cash and short-term receivables.

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 ₹570.2b company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, Berger Paints India also has more cash than debt, so we're pretty confident it can manage its debt safely.

Berger Paints India's EBIT was pretty flat over the last year, but that shouldn't be an issue given the it doesn't have a lot of debt. 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 Berger Paints India 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. Berger Paints India 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, Berger Paints India's free cash flow amounted to 47% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Berger Paints India has ₹2.79b in net cash. So we are not troubled with Berger Paints India's debt use. 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.