We Think West Coast Paper Mills (NSE:WSTCSTPAPR) Can Stay On Top Of Its Debt

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.' 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 West Coast Paper Mills Limited (NSE:WSTCSTPAPR) makes use of debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for West Coast Paper Mills

How Much Debt Does West Coast Paper Mills Carry?

As you can see below, at the end of September 2024, West Coast Paper Mills had ₹3.90b of debt, up from ₹1.06b a year ago. Click the image for more detail. However, it does have ₹16.2b in cash offsetting this, leading to net cash of ₹12.3b.

How Healthy Is West Coast Paper Mills' Balance Sheet?

The latest balance sheet data shows that West Coast Paper Mills had liabilities of ₹10.0b due within a year, and liabilities of ₹5.11b falling due after that. Offsetting this, it had ₹16.2b in cash and ₹3.37b in receivables that were due within 12 months. So it actually has ₹4.41b more liquid assets than total liabilities.

This short term liquidity is a sign that West Coast Paper Mills could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that West Coast Paper Mills has more cash than debt is arguably a good indication that it can manage its debt safely.

In fact West Coast Paper Mills's saving grace is its low debt levels, because its EBIT has tanked 65% in the last twelve months. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. There's no doubt that we learn most about debt from the balance sheet. 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While West Coast Paper Mills 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 most recent three years, West Coast Paper Mills recorded free cash flow worth 62% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that West Coast Paper Mills has net cash of ₹12.3b, as well as more liquid assets than liabilities. So we don't have any problem with West Coast Paper Mills's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 3 warning signs for West Coast Paper Mills (1 shouldn't be ignored!) that you should be aware of before investing here.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.