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

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Pidilite Industries Limited (NSE:PIDILITIND) does carry debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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, 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

What Is Pidilite Industries's Net Debt?

The image below, which you can click on for greater detail, shows that Pidilite Industries had debt of ₹1.38b at the end of September 2024, a reduction from ₹1.85b over a year. However, its balance sheet shows it holds ₹25.7b in cash, so it actually has ₹24.3b net cash.

How Strong Is Pidilite Industries' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Pidilite Industries had liabilities of ₹31.6b due within 12 months and liabilities of ₹6.82b due beyond that. Offsetting this, it had ₹25.7b in cash and ₹19.4b in receivables that were due within 12 months. So it actually has ₹6.63b more liquid assets than total liabilities.

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 it's very unlikely that the ₹1.61t company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that Pidilite Industries has more cash than debt is arguably a good indication that it can manage its debt safely.

Also positive, Pidilite Industries grew its EBIT by 22% in the last year, and that should make it easier to pay down debt, going forward. 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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 76% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While it is always sensible to investigate a company's debt, in this case Pidilite Industries has ₹24.3b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 76% of that EBIT to free cash flow, bringing in ₹20b. So is Pidilite Industries's debt a risk? It doesn't seem so to us. 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 instance, we've identified 2 warning signs for Pidilite Industries that 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.