Warren Buffett said: “Volatility is far from synonymous with risk”. So it can be obvious that you need to consider debt, when you think about how risky a given stock is because too much debt can sink a business. We note that Praj Industries Limited (NSE: PRAJIND) has debt on its balance sheet. But the most important question is: what risk does this debt create?
When is debt dangerous?
Generally speaking, debt only becomes a real problem when a company cannot repay it easily, either by raising capital or with its own cash flow. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. While it’s not too common, we often see indebted companies continually diluting their shareholders because lenders are forcing them to raise capital at a ridiculous price. Of course, the advantage of debt is that it often represents cheap capital, especially when it replaces dilution in a business with the ability to reinvest at high rates of return. When we think of a business’s use of debt, we first look at cash flow and debt together.
See our latest review for Praj Industries
What is the debt of Praj Industries?
The image below, which you can click for more details, shows that in March 2021 Praj Industries was in debt of 176.6 million yen, down from zero in a year. However, it has 4.26 billion yen in cash offsetting this, which leads to a net cash position of 4.09 billion yen.
A look at the responsibilities of Praj Industries
We can see from the most recent balance sheet that Praj Industries had liabilities of 7.64 billion yen due within one year and liabilities of 270.2 million yen due beyond. On the other hand, he had 4.26 billion yen in cash and 6.02 billion yen in receivables due within one year. So it actually has ₹ 2.37b Following liquid assets as total liabilities.
This surplus suggests that Praj Industries has a prudent balance sheet and could probably eliminate its debt without too much difficulty. Put simply, the fact that Praj Industries has more cash than debt is arguably a good indication that it can manage its debt safely.
Best of all, Praj Industries increased its EBIT by 286% last year, which is an impressive improvement. This boost will make it even easier to pay down debt in the future. The balance sheet is clearly the area to focus on when analyzing debt. But it is future profits, more than anything, that will determine Praj Industries’ ability to maintain a healthy balance sheet in the future. So, if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.
But our last consideration is also important, because a business cannot pay its debts with paper profits; he needs hard cash. While Praj Industries has net cash on its balance sheet, it’s still worth looking at its ability to convert earnings before interest and taxes (EBIT) into free cash flow, to help us understand how fast it’s building ( or erodes) this cash balance. Fortunately for all shareholders, Praj Industries has actually generated more free cash flow than EBIT over the past three years. This kind of cash conversion makes us as excited as the crowd when the pace drops at a Daft Punk concert.
While it’s always a good idea to investigate a company’s debt, in this case Praj Industries has 4.09 billion yen in net cash and a decent balance sheet. And it impressed us with free cash flow of 2.2 billion euros, or 116% of its EBIT. So is Praj Industries’ debt a risk? It does not seem to us. The balance sheet is clearly the area to focus on when analyzing debt. However, not all investment risks lie on the balance sheet – far from it. We have identified 1 warning sign with Praj Industries, and understanding them should be part of your investment process.
If you are interested in investing in companies that can generate profits without the burden of debt, check out this page free list of growing companies that have net cash on the balance sheet.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative material. Simply Wall St has no position in any of the stocks mentioned.
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