PI Industries (NSE:PIIND) Has A Pretty Healthy Balance Sheet

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. As with many other companies PI Industries Limited (NSE:PIIND) makes use of debt. But the real question is whether this debt is making the company risky.

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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 examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for PI Industries

What Is PI Industries's Net Debt?

The image below, which you can click on for greater detail, shows that PI Industries had debt of ₹3.48b at the end of September 2021, a reduction from ₹4.16b over a year. But it also has ₹23.7b in cash to offset that, meaning it has ₹20.2b net cash.

How Strong Is PI Industries' Balance Sheet?

The latest balance sheet data shows that PI Industries had liabilities of ₹14.4b due within a year, and liabilities of ₹3.59b falling due after that. Offsetting these obligations, it had cash of ₹23.7b as well as receivables valued at ₹9.68b due within 12 months. So it can boast ₹15.4b more liquid assets than total liabilities.

This surplus suggests that PI Industries has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, PI Industries boasts net cash, so it's fair to say it does not have a heavy debt load!

The good news is that PI Industries has increased its EBIT by 9.8% 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 ultimately the future profitability of the business will decide if PI 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 PI 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 last three years, PI Industries reported free cash flow worth 14% of its EBIT, which is really quite low. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing up

While it is always sensible to investigate a company's debt, in this case PI Industries has ₹20.2b in net cash and a decent-looking balance sheet. And it also grew its EBIT by 9.8% over the last year. So we don't have any problem with PI Industries's use of debt. 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.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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.