Is West Coast Paper Mills (NSE:WSTCSTPAPR) Using Too Much Debt?

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. Importantly, West Coast Paper Mills Limited (NSE:WSTCSTPAPR) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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 West Coast Paper Mills

How Much Debt Does West Coast Paper Mills Carry?

The image below, which you can click on for greater detail, shows that West Coast Paper Mills had debt of ₹1.33b at the end of September 2023, a reduction from ₹3.22b over a year. But it also has ₹14.2b in cash to offset that, meaning it has ₹12.8b net cash.

How Healthy Is West Coast Paper Mills' Balance Sheet?

According to the last reported balance sheet, West Coast Paper Mills had liabilities of ₹7.97b due within 12 months, and liabilities of ₹3.37b due beyond 12 months. Offsetting these obligations, it had cash of ₹14.2b as well as receivables valued at ₹3.27b due within 12 months. So it can boast ₹6.10b more liquid assets than total liabilities.

This excess liquidity suggests that West Coast Paper Mills is taking a careful approach to debt. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, West Coast Paper Mills boasts net cash, so it's fair to say it does not have a heavy debt load!

The good news is that West Coast Paper Mills has increased its EBIT by 3.7% over twelve months, which should ease any concerns about debt repayment. When analysing debt levels, the balance sheet is the obvious place to start. But it is West Coast Paper Mills'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 business needs free cash flow to pay off debt; accounting profits just don't cut it. West Coast Paper Mills 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. Over the last three years, West Coast Paper Mills recorded free cash flow worth a fulsome 92% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While it is always sensible to investigate a company's debt, in this case West Coast Paper Mills has ₹12.8b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 92% of that EBIT to free cash flow, bringing in ₹11b. So we don't think West Coast Paper Mills's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 1 warning sign we've spotted with West Coast Paper Mills .

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.