Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett said “volatility is far from risk.” It’s only natural to consider a company’s balance sheet when looking at its level of risk, as debt is often involved when a business collapses. Like many other companies Prince Pipes and Fittings Limited (NSE: PRINCEPIPE) uses debt. But does this debt worry shareholders?
When is debt dangerous?
Debts and other liabilities become risky for a business when it cannot easily meet these obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a business can go bankrupt if it cannot pay its creditors. 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. The first step in examining a company’s debt levels is to consider its cash flow and debt together.
See our latest review for Prince Pipes and Fittings
What is the debt of Prince Pipes and Fittings?
The image below, which you can click for more details, shows Prince Pipes and Fittings owed 880.3 million yen at the end of March 2021, a reduction from 2.48 billion yen. yen over one year. But on the other hand, it also has 2.33 billion yen in cash, which leads to a net cash position of 1.45 billion yen.
A look at the responsibilities of Prince Pipes and Fittings
According to the latest published balance sheet, Prince Pipes and Fittings had liabilities of 5.22 billion yen due within 12 months and liabilities of 408.5 million yen due beyond 12 months. On the other hand, he had cash of 2.33 billion yen and 3.62 billion yen in receivables within a year. So it actually has ₹ 326.1m Following liquid assets as total liabilities.
Considering the size of Prince Pipes and Fittings, it appears that its liquid assets are well balanced with its total liabilities. So the 75.5 billion yen company is highly unlikely to run out of cash, but it’s still worth keeping an eye on the balance sheet. Put simply, the fact that Prince Pipes and Fittings has more cash than debt is arguably a good indication that it can safely manage its debt.
Best of all, Prince Pipes and Fittings increased their EBIT by 102% last year, which is an impressive improvement. If sustained, this growth will make debt even more manageable in the years to come. When analyzing debt levels, the balance sheet is the obvious starting point. But it is future profits, more than anything, that will determine Prince Pipes and Fittings’s 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.
Finally, a business needs free cash flow to pay off debts; accounting profits are not enough. Although Prince Pipes and Fittings has net cash on its balance sheet, it is still worth examining its ability to convert earnings before interest and taxes (EBIT) into free cash flow, to help us understand how quickly it is. this cash balance is built (or eroded). Over the past three years, Prince Pipes and Fittings’s free cash flow has been 32% of its EBIT, less than we expected. It’s not great when it comes to paying down debt.
While we sympathize with investors who find debt worrying, you should keep in mind that Prince Pipes and Fittings has net liquidity of 1.45 billion yen, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 102% over last year. So is Prince Pipes and Fittings debt a risk? It does not seem to us. The balance sheet is clearly the area you need to focus on when analyzing debt. But at the end of the day, every business can contain risks that exist off the balance sheet. Example: we have spotted 2 warning signs for Prince Pipes and Fittings you must be aware.
At the end of the day, it’s often best to focus on businesses that don’t have net debt. You can access our special list of these companies (all with a history of profit growth). It’s free.
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