Does Pidilite Industries (NSE:PIDILITIND) Have A Healthy Balance Sheet?

Warren Buffett famously said, '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. Importantly, Pidilite Industries Limited (NSE:PIDILITIND) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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

Check out our latest analysis for Pidilite Industries

What Is Pidilite Industries's Debt?

The image below, which you can click on for greater detail, shows that Pidilite Industries had debt of ₹1.85b at the end of September 2023, a reduction from ₹5.52b over a year. But it also has ₹13.4b in cash to offset that, meaning it has ₹11.5b net cash.

How Strong Is Pidilite Industries' Balance Sheet?

We can see from the most recent balance sheet that Pidilite Industries had liabilities of ₹27.9b falling due within a year, and liabilities of ₹6.83b due beyond that. Offsetting these obligations, it had cash of ₹13.4b as well as receivables valued at ₹17.8b due within 12 months. So it has liabilities totalling ₹3.52b more than its cash and near-term receivables, combined.

This state of affairs indicates that Pidilite Industries' 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 ₹1.40t company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, Pidilite Industries also has more cash than debt, so we're pretty confident it can manage its debt safely.

Also good is that Pidilite Industries grew its EBIT at 18% over the last year, further increasing its ability to manage debt. 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 Pidilite Industries 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. Pidilite Industries 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. During the last three years, Pidilite Industries produced sturdy free cash flow equating to 58% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

We could understand if investors are concerned about Pidilite Industries's liabilities, but we can be reassured by the fact it has has net cash of ₹11.5b. And it impressed us with its EBIT growth of 18% over the last year. So we don't think Pidilite Industries's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example - Pidilite Industries has 1 warning sign we think you should be aware of.

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.