PI Industries (NSE:PIIND) Seems To Use Debt Rather Sparingly

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.' 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. We can see that PI Industries Limited (NSE:PIIND) does use debt in its business. But the more important question is: how much risk is that debt creating?

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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for PI Industries

How Much Debt Does PI Industries Carry?

As you can see below, PI Industries had ₹1.26b of debt at September 2023, down from ₹2.36b a year prior. However, it does have ₹29.6b in cash offsetting this, leading to net cash of ₹28.3b.

How Strong Is PI Industries' Balance Sheet?

The latest balance sheet data shows that PI Industries had liabilities of ₹18.6b due within a year, and liabilities of ₹2.89b falling due after that. On the other hand, it had cash of ₹29.6b and ₹16.8b worth of receivables due within a year. So it can boast ₹24.9b 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!

Also positive, PI Industries grew its EBIT by 29% 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 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.

Finally, while the tax-man may adore accounting profits, lenders only accept 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 49% 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 ₹28.3b in net cash and a decent-looking balance sheet. And we liked the look of last year's 29% year-on-year EBIT growth. So we don't think PI Industries's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in PI Industries, you may well want to click here to check an interactive graph of its earnings per share history.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.