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

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 Kansai Nerolac Paints Limited (NSE:KANSAINER) does use debt in its business. But is this debt a concern to shareholders?

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. If things get really bad, the lenders can take control of the business. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

Check out 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 ₹1.60b of debt in March 2023, down from ₹2.03b, one year before. However, its balance sheet shows it holds ₹6.25b in cash, so it actually has ₹4.65b net cash.

A Look At Kansai Nerolac Paints' Liabilities

The latest balance sheet data shows that Kansai Nerolac Paints had liabilities of ₹15.1b due within a year, and liabilities of ₹2.39b falling due after that. On the other hand, it had cash of ₹6.25b and ₹12.4b worth of receivables due within a year. So it actually has ₹1.17b more liquid assets than total liabilities.

Having regard to Kansai Nerolac Paints' size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the ₹229.3b 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!

On top of that, Kansai Nerolac Paints grew its EBIT by 33% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Kansai Nerolac Paints'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 company can only pay off debt with cold hard cash, not accounting profits. 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. In the last three years, Kansai Nerolac Paints's free cash flow amounted to 35% 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 Kansai Nerolac Paints has ₹4.65b in net cash and a decent-looking balance sheet. And we liked the look of last year's 33% year-on-year EBIT growth. So is Kansai Nerolac Paints's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Kansai Nerolac Paints has 1 warning sign we think you should be aware of.

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.