Kansai Nerolac Paints (NSE:KANSAINER) Has A Pretty Healthy Balance Sheet

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Kansai Nerolac Paints Limited (NSE:KANSAINER) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. 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 examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Kansai Nerolac Paints

How Much Debt Does Kansai Nerolac Paints Carry?

As you can see below, at the end of March 2022, Kansai Nerolac Paints had ₹2.03b of debt, up from ₹1.73b a year ago. Click the image for more detail. But on the other hand it also has ₹3.13b in cash, leading to a ₹1.10b net cash position.

How Strong Is Kansai Nerolac Paints' Balance Sheet?

According to the last reported balance sheet, Kansai Nerolac Paints had liabilities of ₹13.3b due within 12 months, and liabilities of ₹2.32b due beyond 12 months. On the other hand, it had cash of ₹3.13b and ₹11.3b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹1.18b.

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 ₹213.3b company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Kansai Nerolac Paints boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that Kansai Nerolac Paints's load is not too heavy, because its EBIT was down 31% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. The balance sheet is clearly the area to focus on when you are analysing debt. 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.

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. In the last three years, Kansai Nerolac Paints's free cash flow amounted to 38% 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 look at a company's total liabilities, it is very reassuring that Kansai Nerolac Paints has ₹1.10b in net cash. So we are not troubled with Kansai Nerolac Paints's debt use. 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. For instance, we've identified 2 warning signs for Kansai Nerolac Paints that you should be aware of.

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.