These 4 Measures Indicate That Pidilite Industries (NSE:PIDILITIND) Is Using Debt Reasonably Well

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. As with many other companies Pidilite Industries Limited (NSE:PIDILITIND) makes use of debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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.

See our latest analysis for Pidilite Industries

How Much Debt Does Pidilite Industries Carry?

You can click the graphic below for the historical numbers, but it shows that as of March 2022 Pidilite Industries had ₹2.87b of debt, an increase on ₹2.23b, over one year. But it also has ₹5.29b in cash to offset that, meaning it has ₹2.41b net cash.

A Look At Pidilite Industries' Liabilities

Zooming in on the latest balance sheet data, we can see that Pidilite Industries had liabilities of ₹23.3b due within 12 months and liabilities of ₹5.88b due beyond that. On the other hand, it had cash of ₹5.29b and ₹14.5b worth of receivables due within a year. So its liabilities total ₹9.37b more than the combination of its cash and short-term receivables.

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 ₹1.09t company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Pidilite Industries boasts net cash, so it's fair to say it does not have a heavy debt load!

The good news is that Pidilite Industries has increased its EBIT by 8.0% over twelve months, which should ease any concerns about debt repayment. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Pidilite Industries can strengthen its balance sheet over time. 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 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. Over the most recent three years, Pidilite Industries recorded free cash flow worth 54% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Pidilite Industries has ₹2.41b in net cash. And it also grew its EBIT by 8.0% 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. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Pidilite Industries has 2 warning signs we think 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.

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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.