Kansai Nerolac Paints (NSE:KANSAINER) Could Easily Take On More Debt

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. As with many other companies Kansai Nerolac Paints Limited (NSE:KANSAINER) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Kansai Nerolac Paints

What Is Kansai Nerolac Paints's Debt?

The image below, which you can click on for greater detail, shows that Kansai Nerolac Paints had debt of ₹1.67b at the end of September 2023, a reduction from ₹1.91b over a year. But on the other hand it also has ₹10.9b in cash, leading to a ₹9.23b net cash position.

How Strong Is Kansai Nerolac Paints' Balance Sheet?

We can see from the most recent balance sheet that Kansai Nerolac Paints had liabilities of ₹15.2b falling due within a year, and liabilities of ₹2.69b due beyond that. Offsetting this, it had ₹10.9b in cash and ₹16.1b in receivables that were due within 12 months. So it can boast ₹9.10b more liquid assets than total liabilities.

This surplus suggests that Kansai Nerolac Paints has a conservative balance sheet, and could probably eliminate its debt without much difficulty. 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 36% 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 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs 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 31% 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 ₹9.23b in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 36% over the last year. So is Kansai Nerolac Paints's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Kansai Nerolac Paints is showing 3 warning signs in our investment analysis , and 1 of those is a bit unpleasant...

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.