Does Finolex Industries (NSE:FINPIPE) Have A Healthy Balance Sheet?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Finolex Industries Limited (NSE:FINPIPE) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Finolex Industries

What Is Finolex Industries's Net Debt?

The image below, which you can click on for greater detail, shows that at March 2023 Finolex Industries had debt of ₹5.26b, up from ₹2.78b in one year. But on the other hand it also has ₹18.3b in cash, leading to a ₹13.0b net cash position.

How Healthy Is Finolex Industries' Balance Sheet?

The latest balance sheet data shows that Finolex Industries had liabilities of ₹11.4b due within a year, and liabilities of ₹2.46b falling due after that. Offsetting these obligations, it had cash of ₹18.3b as well as receivables valued at ₹3.20b due within 12 months. So it actually has ₹7.66b more liquid assets than total liabilities.

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

It is just as well that Finolex Industries's load is not too heavy, because its EBIT was down 78% over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. 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 Finolex Industries'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, a company can only pay off debt with cold hard cash, not accounting profits. Finolex Industries may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, Finolex Industries produced sturdy free cash flow equating to 75% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Finolex Industries has net cash of ₹13.0b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of ₹1.3b, being 75% of its EBIT. So we are not troubled with Finolex Industries's debt use. 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. To that end, you should be aware of the 2 warning signs we've spotted with Finolex Industries .

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.