Stock Analysis

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

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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 A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Finolex Industries

What Is Finolex Industries's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Finolex Industries had ₹271.6m of debt in September 2022, down from ₹301.6m, one year before. However, it does have ₹11.2b in cash offsetting this, leading to net cash of ₹10.9b.

NSEI:FINPIPE Debt to Equity History March 15th 2023

How Strong Is Finolex Industries' Balance Sheet?

The latest balance sheet data shows that Finolex Industries had liabilities of ₹6.95b due within a year, and liabilities of ₹2.10b falling due after that. Offsetting this, it had ₹11.2b in cash and ₹2.81b in receivables that were due within 12 months. So it can boast ₹4.96b 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!

In fact Finolex Industries's saving grace is its low debt levels, because its EBIT has tanked 76% in the last twelve months. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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 we empathize with investors who find debt concerning, you should keep in mind that Finolex Industries has net cash of ₹10.9b, as well as more liquid assets than liabilities. 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. However, not all investment risk resides within the balance sheet - far from it. We've identified 3 warning signs with Finolex Industries , 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.

Valuation is complex, but we're helping make it simple.

Find out whether Finolex Industries is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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