We Think Linde India (NSE:LINDEINDIA) Can Stay On Top Of Its 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.' 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. We can see that Linde India Limited (NSE:LINDEINDIA) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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, 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. When we think about a company's use of debt, we first look at cash and debt together.

What Is Linde India's Debt?

As you can see below, at the end of September 2024, Linde India had ₹424.8m of debt, up from ₹216.0m a year ago. Click the image for more detail. However, it does have ₹9.98b in cash offsetting this, leading to net cash of ₹9.56b.

How Strong Is Linde India's Balance Sheet?

The latest balance sheet data shows that Linde India had liabilities of ₹10.5b due within a year, and liabilities of ₹2.98b falling due after that. Offsetting these obligations, it had cash of ₹9.98b as well as receivables valued at ₹4.06b due within 12 months. So it actually has ₹546.8m more liquid assets than total liabilities.

Having regard to Linde India's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the ₹551.9b company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that Linde India has more cash than debt is arguably a good indication that it can manage its debt safely.

See our latest analysis for Linde India

Fortunately, Linde India grew its EBIT by 6.7% in the last year, making that debt load look even more manageable. 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 Linde India can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Linde India 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, Linde India recorded free cash flow of 23% 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 Linde India has ₹9.56b in net cash and a decent-looking balance sheet. On top of that, it increased its EBIT by 6.7% in the last twelve months. So we don't have any problem with Linde India's use of debt. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Linde India's earnings per share history for free.

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.