These 4 Measures Indicate That Platinum Industries (NSE:PLATIND) Is Using Debt Reasonably Well

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. As with many other companies Platinum Industries Limited (NSE:PLATIND) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Platinum Industries

What Is Platinum Industries's Net Debt?

As you can see below, at the end of September 2024, Platinum Industries had ₹135.0m of debt, up from ₹74.8m a year ago. Click the image for more detail. However, its balance sheet shows it holds ₹1.85b in cash, so it actually has ₹1.72b net cash.

How Healthy Is Platinum Industries' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Platinum Industries had liabilities of ₹494.1m due within 12 months and liabilities of ₹50.9m due beyond that. Offsetting these obligations, it had cash of ₹1.85b as well as receivables valued at ₹919.6m due within 12 months. So it actually has ₹2.23b more liquid assets than total liabilities.

It's good to see that Platinum Industries has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Due to its strong net asset position, it is not likely to face issues with its lenders. Simply put, the fact that Platinum Industries has more cash than debt is arguably a good indication that it can manage its debt safely.

Fortunately, Platinum Industries grew its EBIT by 6.7% in the last year, making that debt load look even more manageable. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Platinum Industries will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Platinum 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, Platinum Industries burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While it is always sensible to investigate a company's debt, in this case Platinum Industries has ₹1.72b in net cash and a decent-looking balance sheet. On top of that, it increased its EBIT by 6.7% in the last twelve months. So we are not troubled with Platinum Industries's debt use. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Platinum Industries you should know about.

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.