We Think Finolex Industries (NSE:FINPIPE) Can Stay On Top Of Its Debt

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. Importantly, Finolex Industries Limited (NSE:FINPIPE) does carry debt. But is this debt a concern to shareholders?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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

What Is Finolex Industries's Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2022 Finolex Industries had ₹2.78b of debt, an increase on ₹2.04b, over one year. But on the other hand it also has ₹16.3b in cash, leading to a ₹13.6b net cash position.

How Healthy Is Finolex Industries' Balance Sheet?

We can see from the most recent balance sheet that Finolex Industries had liabilities of ₹12.0b falling due within a year, and liabilities of ₹2.19b due beyond that. Offsetting these obligations, it had cash of ₹16.3b as well as receivables valued at ₹3.56b due within 12 months. So it can boast ₹5.72b 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.

The good news is that Finolex Industries has increased its EBIT by 3.1% over twelve months, which should ease any concerns about debt repayment. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Finolex Industries can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Finolex Industries 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. Over the most recent three years, Finolex Industries recorded free cash flow worth 65% 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 it is always sensible to investigate a company's debt, in this case Finolex Industries has ₹13.6b in net cash and a decent-looking balance sheet. 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. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 3 warning signs for Finolex Industries you should be aware of, and 2 of them are a bit concerning.

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.