Carborundum Universal (NSE:CARBORUNIV) Has A Pretty Healthy Balance Sheet

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Carborundum Universal Limited (NSE:CARBORUNIV) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Carborundum Universal

How Much Debt Does Carborundum Universal Carry?

You can click the graphic below for the historical numbers, but it shows that as of March 2023 Carborundum Universal had ₹2.30b of debt, an increase on ₹2.12b, over one year. However, its balance sheet shows it holds ₹4.00b in cash, so it actually has ₹1.70b net cash.

A Look At Carborundum Universal's Liabilities

According to the last reported balance sheet, Carborundum Universal had liabilities of ₹7.38b due within 12 months, and liabilities of ₹2.38b due beyond 12 months. On the other hand, it had cash of ₹4.00b and ₹6.27b worth of receivables due within a year. So it actually has ₹515.3m more liquid assets than total liabilities.

Having regard to Carborundum Universal's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the ₹220.7b company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that Carborundum Universal has more cash than debt is arguably a good indication that it can manage its debt safely.

The good news is that Carborundum Universal has increased its EBIT by 5.3% over twelve months, which should ease any concerns about debt repayment. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Carborundum Universal's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Carborundum Universal 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, Carborundum Universal's free cash flow amounted to 43% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Carborundum Universal has net cash of ₹1.70b, as well as more liquid assets than liabilities. And it also grew its EBIT by 5.3% over the last year. So we don't have any problem with Carborundum Universal's use of debt. Over time, share prices tend to follow earnings per share, so if you're interested in Carborundum Universal, you may well want to click here to check an interactive graph of its earnings per share history.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.