Kansai Nerolac Paints (NSE:KANSAINER) Could Easily Take On More 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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Kansai Nerolac Paints Limited (NSE:KANSAINER) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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?

As you can see below, Kansai Nerolac Paints had ₹3.23b of debt, at September 2023, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has ₹10.9b in cash, leading to a ₹7.67b net cash position.

A Look At Kansai Nerolac Paints' Liabilities

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 actually has ₹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 49% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. 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, 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. In the last three years, Kansai Nerolac Paints's free cash flow amounted to 32% 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 ₹7.67b in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 49% 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. However, not all investment risk resides within the balance sheet - far from it. Be aware that Kansai Nerolac Paints is showing 3 warning signs in our investment analysis , and 1 of those is a bit unpleasant...

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.