Is Carborundum Universal (NSE:CARBORUNIV) 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.' 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. Importantly, Carborundum Universal Limited (NSE:CARBORUNIV) does carry debt. But the real question is whether this debt is making the company risky.

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When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Carborundum Universal's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2025 Carborundum Universal had ₹2.16b of debt, an increase on ₹1.72b, over one year. However, it does have ₹3.79b in cash offsetting this, leading to net cash of ₹1.62b.

How Healthy Is Carborundum Universal's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Carborundum Universal had liabilities of ₹7.17b due within 12 months and liabilities of ₹2.50b due beyond that. Offsetting these obligations, it had cash of ₹3.79b as well as receivables valued at ₹8.81b due within 12 months. So it can boast ₹2.92b 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 it's very unlikely that the ₹189.1b company is short on cash, but still worth keeping an eye on the 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.

View our latest analysis for Carborundum Universal

The modesty of its debt load may become crucial for Carborundum Universal if management cannot prevent a repeat of the 25% cut to EBIT over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. 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. Looking at the most recent three years, Carborundum Universal recorded free cash flow of 42% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Carborundum Universal has ₹1.62b in net cash and a decent-looking balance sheet. So we are not troubled with Carborundum Universal's debt use. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 3 warning signs for Carborundum Universal that you should be aware of before investing here.

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.