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

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. We note that Pidilite Industries Limited (NSE:PIDILITIND) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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 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 ₹3.79b at the end of September 2024, a reduction from ₹4.16b over a year. But it also has ₹25.7b in cash to offset that, meaning it has ₹21.9b net cash.

How Strong Is Pidilite Industries' Balance Sheet?

The latest balance sheet data shows that Pidilite Industries had liabilities of ₹31.6b due within a year, and liabilities of ₹6.82b falling due after that. Offsetting these obligations, it had cash of ₹25.7b as well as receivables valued at ₹19.4b due within 12 months. So it can boast ₹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 while it's hard to imagine that the ₹1.42t company is struggling for cash, we still think it's worth monitoring its 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 good is that Pidilite Industries grew its EBIT at 12% 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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 free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Pidilite Industries has net cash of ₹21.9b, as well as more liquid assets than liabilities. 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. 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. To that end, you should be aware of the 1 warning sign we've spotted with Pidilite Industries .

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.