These 4 Measures Indicate That Carborundum Universal (NSE:CARBORUNIV) Is Using Debt Reasonably Well

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies Carborundum Universal Limited (NSE:CARBORUNIV) makes use of debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Carborundum Universal

What Is Carborundum Universal's Debt?

As you can see below, at the end of March 2022, Carborundum Universal had ₹2.12b of debt, up from ₹430.2m a year ago. Click the image for more detail. However, its balance sheet shows it holds ₹3.52b in cash, so it actually has ₹1.39b net cash.

How Healthy Is Carborundum Universal's Balance Sheet?

We can see from the most recent balance sheet that Carborundum Universal had liabilities of ₹7.73b falling due within a year, and liabilities of ₹1.00b due beyond that. On the other hand, it had cash of ₹3.52b and ₹4.85b worth of receivables due within a year. So its liabilities total ₹367.6m more than the combination of its cash and short-term receivables.

Having regard to Carborundum Universal's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the ₹130.0b company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, 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 14% last year, making its debt load easier to handle. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Carborundum Universal 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.

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 28% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing up

We could understand if investors are concerned about Carborundum Universal's liabilities, but we can be reassured by the fact it has has net cash of ₹1.39b. And it also grew its EBIT by 14% over the last year. So we don't have any problem with Carborundum Universal's use of debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 2 warning signs with Carborundum Universal (at least 1 which makes us a bit uncomfortable) , and understanding them should be part of your investment process.

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.