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

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.' 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. As with many other companies Finolex Industries Limited (NSE:FINPIPE) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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 step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Finolex Industries

How Much Debt Does Finolex Industries Carry?

You can click the graphic below for the historical numbers, but it shows that Finolex Industries had ₹3.51b of debt in September 2024, down from ₹5.91b, one year before. However, it does have ₹21.7b in cash offsetting this, leading to net cash of ₹18.2b.

How Strong Is Finolex Industries' Balance Sheet?

The latest balance sheet data shows that Finolex Industries had liabilities of ₹11.3b due within a year, and liabilities of ₹4.75b falling due after that. Offsetting this, it had ₹21.7b in cash and ₹3.67b in receivables that were due within 12 months. So it can boast ₹9.33b more liquid assets than total liabilities.

This surplus suggests that Finolex Industries has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Finolex Industries boasts net cash, so it's fair to say it does not have a heavy debt load!

But the other side of the story is that Finolex Industries saw its EBIT decline by 9.5% over the last year. That sort of decline, if sustained, will obviously make debt harder to handle. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Finolex Industries 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. 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. Over the most recent three years, Finolex Industries recorded free cash flow worth 66% of its EBIT, which is around normal, given free cash flow excludes interest and tax. 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 ₹18.2b, as well as more liquid assets than liabilities. The cherry on top was that in converted 66% of that EBIT to free cash flow, bringing in ₹5.3b. So we are not troubled with Finolex Industries's debt use. 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. Be aware that Finolex Industries is showing 2 warning signs in our investment analysis , you should know about...

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.