Is Carborundum Universal (NSE:CARBORUNIV) A Risky Investment?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Carborundum Universal Limited (NSE:CARBORUNIV) does use debt in its business. 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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Carborundum Universal

What Is Carborundum Universal's Net Debt?

The image below, which you can click on for greater detail, shows that Carborundum Universal had debt of ₹1.72b at the end of March 2024, a reduction from ₹2.77b over a year. But on the other hand it also has ₹5.56b in cash, leading to a ₹3.84b net cash position.

How Healthy Is Carborundum Universal's Balance Sheet?

The latest balance sheet data shows that Carborundum Universal had liabilities of ₹6.77b due within a year, and liabilities of ₹2.10b falling due after that. Offsetting this, it had ₹5.56b in cash and ₹6.91b in receivables that were due within 12 months. So it can boast ₹3.60b more liquid assets than total liabilities.

This state of affairs indicates that Carborundum Universal'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 ₹300.2b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Carborundum Universal boasts net cash, so it's fair to say it does not have a heavy debt load!

And we also note warmly that Carborundum Universal grew its EBIT by 11% last year, making its debt load easier to handle. There's no doubt that we learn most about debt from the balance sheet. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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 42% 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 ₹3.84b, as well as more liquid assets than liabilities. On top of that, it increased its EBIT by 11% in the last twelve months. So is Carborundum Universal's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. We've identified 1 warning sign with Carborundum Universal , and understanding them should be part of your investment process.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.