These 4 Measures Indicate That Finolex Industries (NSE:FINPIPE) Is Using Debt Safely

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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Finolex Industries Limited (NSE:FINPIPE) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Finolex Industries

How Much Debt Does Finolex Industries Carry?

The image below, which you can click on for greater detail, shows that Finolex Industries had debt of ₹301.6m at the end of September 2021, a reduction from ₹2.43b over a year. But on the other hand it also has ₹10.5b in cash, leading to a ₹10.2b net cash position.

How Strong Is Finolex Industries' Balance Sheet?

According to the last reported balance sheet, Finolex Industries had liabilities of ₹7.37b due within 12 months, and liabilities of ₹2.13b due beyond 12 months. Offsetting these obligations, it had cash of ₹10.5b as well as receivables valued at ₹2.60b due within 12 months. So it can boast ₹3.65b 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. Succinctly put, Finolex Industries boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, Finolex Industries grew its EBIT by 180% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. 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. In the last three years, Finolex Industries's free cash flow amounted to 50% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing up

While it is always sensible to investigate a company's debt, in this case Finolex Industries has ₹10.2b in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 180% over the last year. So we don't think Finolex Industries'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. We've identified 2 warning signs with Finolex Industries (at least 1 which is a bit unpleasant) , and understanding them should be part of your investment process.

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.