Century Plyboards (India) (NSE:CENTURYPLY) Seems To Use Debt Rather Sparingly

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. We note that Century Plyboards (India) Limited (NSE:CENTURYPLY) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Century Plyboards (India)

How Much Debt Does Century Plyboards (India) Carry?

As you can see below, at the end of September 2021, Century Plyboards (India) had ₹1.92b of debt, up from ₹1.52b a year ago. Click the image for more detail. On the flip side, it has ₹1.70b in cash leading to net debt of about ₹212.6m.

How Healthy Is Century Plyboards (India)'s Balance Sheet?

According to the last reported balance sheet, Century Plyboards (India) had liabilities of ₹5.55b due within 12 months, and liabilities of ₹397.2m due beyond 12 months. Offsetting this, it had ₹1.70b in cash and ₹3.53b in receivables that were due within 12 months. So its liabilities total ₹719.1m more than the combination of its cash and short-term receivables.

This state of affairs indicates that Century Plyboards (India)'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 ₹133.2b company is short on cash, but still worth keeping an eye on the balance sheet. Carrying virtually no net debt, Century Plyboards (India) has a very light debt load indeed.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

Century Plyboards (India) has very little debt (net of cash), and boasts a debt to EBITDA ratio of 0.045 and EBIT of 42.8 times the interest expense. So relative to past earnings, the debt load seems trivial. Even more impressive was the fact that Century Plyboards (India) grew its EBIT by 102% over twelve months. That boost will make it even easier to pay down debt going forward. 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 Century Plyboards (India)'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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So we clearly need to look at whether that EBIT is leading to corresponding free cash flow. During the last three years, Century Plyboards (India) produced sturdy free cash flow equating to 70% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Our View

Century Plyboards (India)'s interest cover suggests it can handle its debt as easily as Cristiano Ronaldo could score a goal against an under 14's goalkeeper. And that's just the beginning of the good news since its EBIT growth rate is also very heartening. We think Century Plyboards (India) is no more beholden to its lenders, than the birds are to birdwatchers. To our minds it has a healthy happy balance sheet. Over time, share prices tend to follow earnings per share, so if you're interested in Century Plyboards (India), you may well want to click here to check an interactive graph of its earnings per share history.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.