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. It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Page Industries Limited (NSE:PAGEIND) does use debt in its business. But the real question is whether this debt is making the company risky.
When Is Debt Dangerous?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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.
How Much Debt Does Page Industries Carry?
As you can see below, Page Industries had ₹303.3m of debt at September 2019, down from ₹479.5m a year prior. But it also has ₹768.9m in cash to offset that, meaning it has ₹465.6m net cash.
How Strong Is Page Industries's Balance Sheet?
The latest balance sheet data shows that Page Industries had liabilities of ₹5.13b due within a year, and liabilities of ₹1.46b falling due after that. On the other hand, it had cash of ₹768.9m and ₹1.37b worth of receivables due within a year. So its liabilities total ₹4.45b more than the combination of its cash and short-term receivables.
Having regard to Page Industries's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the ₹265.0b company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, Page Industries also has more cash than debt, so we're pretty confident it can manage its debt safely.
While Page Industries doesn't seem to have gained much on the EBIT line, at least earnings remain stable for now. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Page 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. Page 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, Page 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.
While it is always sensible to look at a company's total liabilities, it is very reassuring that Page Industries has ₹465.6m in net cash. So we are not troubled with Page Industries's debt use. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Page Industries's earnings per share history for free.
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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