Kansai Nerolac Paints (NSE:KANSAINER) Seems To Use Debt Rather Sparingly

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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 the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, 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. The first step when considering a company's debt levels is to consider its 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, at the end of March 2021, Kansai Nerolac Paints had ₹2.69b of debt, up from ₹2.42b a year ago. Click the image for more detail. However, its balance sheet shows it holds ₹7.90b in cash, so it actually has ₹5.21b net cash.

How Strong Is Kansai Nerolac Paints' Balance Sheet?

We can see from the most recent balance sheet that Kansai Nerolac Paints had liabilities of ₹12.4b falling due within a year, and liabilities of ₹2.04b due beyond that. On the other hand, it had cash of ₹7.90b and ₹10.2b worth of receivables due within a year. So it can boast ₹3.68b more liquid assets than total liabilities.

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 while it's hard to imagine that the ₹337.2b company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that Kansai Nerolac Paints has more cash than debt is arguably a good indication that it can manage its debt safely.

In addition to that, we're happy to report that Kansai Nerolac Paints has boosted its EBIT by 68%, thus reducing the spectre of future debt repayments. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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 ₹5.21b in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 68% over the last year. So is Kansai Nerolac Paints's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Kansai Nerolac Paints you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.
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