Tinplate Company of India (NSE:TINPLATE) Could Easily Take On More Debt

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. As with many other companies The Tinplate Company of India Limited (NSE:TINPLATE) makes use of debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Tinplate Company of India

What Is Tinplate Company of India's Debt?

As you can see below, Tinplate Company of India had ₹133.8m of debt, at March 2021, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has ₹2.87b in cash, leading to a ₹2.73b net cash position.

How Strong Is Tinplate Company of India's Balance Sheet?

The latest balance sheet data shows that Tinplate Company of India had liabilities of ₹3.81b due within a year, and liabilities of ₹1.28b falling due after that. Offsetting these obligations, it had cash of ₹2.87b as well as receivables valued at ₹868.1m due within 12 months. So its liabilities total ₹1.36b more than the combination of its cash and short-term receivables.

Of course, Tinplate Company of India has a market capitalization of ₹30.0b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Tinplate Company of India boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that Tinplate Company of India grew its EBIT by 145% over twelve months. That boost will make it even easier to pay down debt going forward. There's no doubt that we learn most about debt from the balance sheet. But it is Tinplate Company of India's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Tinplate Company of India 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, Tinplate Company of India generated free cash flow amounting to a very robust 98% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Tinplate Company of India has ₹2.73b in net cash. The cherry on top was that in converted 98% of that EBIT to free cash flow, bringing in ₹2.2b. So is Tinplate Company of India's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. 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 2 warning signs for Tinplate Company of India 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.
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