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

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.' 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 Finolex Industries Limited (NSE:FINPIPE) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Finolex Industries

What Is Finolex Industries's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2023 Finolex Industries had ₹6.05b of debt, an increase on ₹271.6m, over one year. However, it does have ₹18.2b in cash offsetting this, leading to net cash of ₹12.1b.

How Strong Is Finolex Industries' Balance Sheet?

According to the last reported balance sheet, Finolex Industries had liabilities of ₹11.7b due within 12 months, and liabilities of ₹3.42b due beyond 12 months. On the other hand, it had cash of ₹18.2b and ₹3.48b worth of receivables due within a year. So it can boast ₹6.59b 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.

In addition to that, we're happy to report that Finolex Industries has boosted its EBIT by 96%, thus reducing the spectre of future debt repayments. 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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 50% 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 it is always sensible to investigate a company's debt, in this case Finolex Industries has ₹12.1b in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 96% over the last year. So we don't think Finolex Industries's use of debt is risky. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Finolex Industries 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.