We Think Castrol India (NSE:CASTROLIND) Can Manage Its Debt With Ease

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. Importantly, Castrol India Limited (NSE:CASTROLIND) does carry debt. But the real question is whether this debt is making the company risky.

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Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. 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. 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.

What Is Castrol India's Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2024 Castrol India had ₹820.2m of debt, an increase on ₹769.5m, over one year. But on the other hand it also has ₹13.8b in cash, leading to a ₹13.0b net cash position.

A Look At Castrol India's Liabilities

According to the last reported balance sheet, Castrol India had liabilities of ₹12.7b due within 12 months, and liabilities of ₹866.9m due beyond 12 months. Offsetting this, it had ₹13.8b in cash and ₹4.95b in receivables that were due within 12 months. So it can boast ₹5.20b more liquid assets than total liabilities.

This short term liquidity is a sign that Castrol India could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Castrol India has more cash than debt is arguably a good indication that it can manage its debt safely.

See our latest analysis for Castrol India

Fortunately, Castrol India grew its EBIT by 7.9% in the last year, making that debt load look even more manageable. 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 Castrol India 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Castrol India 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. During the last three years, Castrol India produced sturdy free cash flow equating to 75% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While it is always sensible to investigate a company's debt, in this case Castrol India has ₹13.0b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of ₹9.5b, being 75% of its EBIT. So we don't think Castrol India's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 1 warning sign we've spotted with Castrol India .

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.