Pidilite Industries (NSE:PIDILITIND) Seems To Use Debt Quite Sensibly

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 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 the more important question is: how much risk is that debt creating?

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 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, 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.

View our latest analysis for Pidilite Industries

How Much Debt Does Pidilite Industries Carry?

The image below, which you can click on for greater detail, shows that Pidilite Industries had debt of ₹1.63b at the end of March 2023, a reduction from ₹2.87b over a year. But it also has ₹8.58b in cash to offset that, meaning it has ₹6.95b net cash.

A Look At Pidilite Industries' Liabilities

According to the last reported balance sheet, Pidilite Industries had liabilities of ₹24.1b due within 12 months, and liabilities of ₹6.68b due beyond 12 months. On the other hand, it had cash of ₹8.58b and ₹15.6b worth of receivables due within a year. So it has liabilities totalling ₹6.59b more than its cash and near-term receivables, combined.

Having regard to Pidilite Industries' size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the ₹1.33t company is short on cash, but still worth keeping an eye on the 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.

The good news is that Pidilite Industries has increased its EBIT by 4.6% over twelve months, which should ease any concerns about debt repayment. 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 Pidilite Industries'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, a company can only pay off debt with cold hard cash, not accounting profits. While Pidilite Industries 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. During the last three years, Pidilite Industries produced sturdy free cash flow equating to 55% 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

While it is always sensible to look at a company's total liabilities, it is very reassuring that Pidilite Industries has ₹6.95b in net cash. So is Pidilite Industries'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. Case in point: We've spotted 2 warning signs for Pidilite Industries you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.