Stock Analysis

We Think Century Plyboards (India) (NSE:CENTURYPLY) Can Stay On Top Of Its Debt

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David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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 Century Plyboards (India) Limited (NSE:CENTURYPLY) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Century Plyboards (India)

What Is Century Plyboards (India)'s Debt?

The image below, which you can click on for greater detail, shows that at September 2022 Century Plyboards (India) had debt of ₹2.51b, up from ₹1.92b in one year. But on the other hand it also has ₹2.80b in cash, leading to a ₹287.4m net cash position.

NSEI:CENTURYPLY Debt to Equity History March 17th 2023

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

The latest balance sheet data shows that Century Plyboards (India) had liabilities of ₹6.31b due within a year, and liabilities of ₹462.5m falling due after that. Offsetting these obligations, it had cash of ₹2.80b as well as receivables valued at ₹3.81b due within 12 months. So it has liabilities totalling ₹165.6m more than its cash and near-term receivables, combined.

Having regard to Century Plyboards (India)'s size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the ₹106.4b company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, Century Plyboards (India) also has more cash than debt, so we're pretty confident it can manage its debt safely.

Also good is that Century Plyboards (India) grew its EBIT at 17% over the last year, further increasing its ability to manage debt. The balance sheet is clearly the area to focus on when you are analysing debt. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Century Plyboards (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. In the last three years, Century Plyboards (India)'s free cash flow amounted to 40% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

We could understand if investors are concerned about Century Plyboards (India)'s liabilities, but we can be reassured by the fact it has has net cash of ₹287.4m. And it impressed us with its EBIT growth of 17% over the last year. So is Century Plyboards (India)'s debt a risk? It doesn't seem so to us. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Century Plyboards (India)'s earnings per share history for free.

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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