Does Kansai Nerolac Paints (NSE:KANSAINER) Have A Healthy Balance Sheet?

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.' 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. As with many other companies Kansai Nerolac Paints Limited (NSE:KANSAINER) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Kansai Nerolac Paints

What Is Kansai Nerolac Paints's Debt?

You can click the graphic below for the historical numbers, but it shows that Kansai Nerolac Paints had ₹1.67b of debt in March 2021, down from ₹1.78b, one year before. However, its balance sheet shows it holds ₹7.93b in cash, so it actually has ₹6.26b net cash.

How Healthy Is Kansai Nerolac Paints' Balance Sheet?

The latest balance sheet data shows that Kansai Nerolac Paints had liabilities of ₹12.4b due within a year, and liabilities of ₹2.04b falling due after that. Offsetting this, it had ₹7.93b in cash and ₹10.2b in receivables that were due within 12 months. So it actually has ₹3.65b more liquid assets than total liabilities.

This state of affairs indicates that Kansai Nerolac Paints' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the ₹301.1b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, Kansai Nerolac Paints boasts net cash, so it's fair to say it does not have a heavy debt load!

Fortunately, Kansai Nerolac Paints grew its EBIT by 5.4% in the last year, making that debt load look even more manageable. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Kansai Nerolac Paints 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. Kansai Nerolac Paints 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. Looking at the most recent three years, Kansai Nerolac Paints recorded free cash flow of 23% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing up

While it is always sensible to investigate a company's debt, in this case Kansai Nerolac Paints has ₹6.26b in net cash and a decent-looking balance sheet. On top of that, it increased its EBIT by 5.4% in the last twelve months. So we are not troubled with Kansai Nerolac Paints's debt use. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Kansai Nerolac Paints you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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