Is PI Industries (NSE:PIIND) A Risky Investment?

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.' 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, PI Industries Limited (NSE:PIIND) does carry debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for PI Industries

How Much Debt Does PI Industries Carry?

As you can see below, PI Industries had ₹465.0m of debt at March 2023, down from ₹3.16b a year prior. But on the other hand it also has ₹32.2b in cash, leading to a ₹31.7b net cash position.

How Strong Is PI Industries' Balance Sheet?

The latest balance sheet data shows that PI Industries had liabilities of ₹11.8b due within a year, and liabilities of ₹994.0m falling due after that. Offsetting this, it had ₹32.2b in cash and ₹8.64b in receivables that were due within 12 months. So it actually has ₹28.0b more liquid assets than total liabilities.

This short term liquidity is a sign that PI Industries could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, PI Industries boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that PI Industries has boosted its EBIT by 38%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine PI 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. PI 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. In the last three years, PI Industries's free cash flow amounted to 48% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While it is always sensible to investigate a company's debt, in this case PI Industries has ₹31.7b in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 38% over the last year. So we don't think PI Industries's use of debt is risky. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of PI Industries's earnings per share history for free.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.