Is Kansai Nerolac Paints (NSE:KANSAINER) Using Too Much Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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. As with many other companies Kansai Nerolac Paints Limited (NSE:KANSAINER) makes use of debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Kansai Nerolac Paints

What Is Kansai Nerolac Paints's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Kansai Nerolac Paints had ₹1.26b of debt in September 2024, down from ₹1.67b, one year before. But on the other hand it also has ₹13.2b in cash, leading to a ₹11.9b net cash position.

A Look At Kansai Nerolac Paints' Liabilities

Zooming in on the latest balance sheet data, we can see that Kansai Nerolac Paints had liabilities of ₹17.2b due within 12 months and liabilities of ₹3.25b due beyond that. On the other hand, it had cash of ₹13.2b and ₹16.6b worth of receivables due within a year. So it actually has ₹9.32b more liquid assets than total liabilities.

This short term liquidity is a sign that Kansai Nerolac Paints could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Kansai Nerolac Paints boasts net cash, so it's fair to say it does not have a heavy debt load!

Kansai Nerolac Paints's EBIT was pretty flat over the last year, but that shouldn't be an issue given the it doesn't have a lot of debt. 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 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. While Kansai Nerolac Paints 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. Looking at the most recent three years, Kansai Nerolac Paints recorded free cash flow of 45% 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 ₹11.9b in net cash and a decent-looking balance sheet. So we don't have any problem with Kansai Nerolac Paints's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 2 warning signs for Kansai Nerolac Paints that you should be aware of before investing here.

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.