Does APAR Industries (NSE:APARINDS) Have A Healthy Balance Sheet?

The external fund manager backed by Berkshire Hathaway’s Charlie Munger, Li Lu, makes no bones about it when he says ‘The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.’ 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 APAR Industries Limited (NSE:APARINDS) makes use of debt. But is this debt a concern to shareholders?

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. Ultimately, if the company can’t fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.

View our latest analysis for APAR Industries

How Much Debt Does APAR Industries Carry?

You can click the graphic below for the historical numbers, but it shows that as of March 2023 APAR Industries had ₹3.84b of debt, an increase on ₹3.20b, over one year. But on the other hand it also has ₹5.58b in cash, leading to a ₹1.74b net cash position.

debt-equity-history-analysis
NSEI:APARINDS Debt to Equity History August 21st 2023

A Look At APAR Industries’ Liabilities

The latest balance sheet data shows that APAR Industries had liabilities of ₹57.3b due within a year, and liabilities of ₹2.54b falling due after that. Offsetting this, it had ₹5.58b in cash and ₹33.6b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹20.6b.

Since publicly traded APAR Industries shares are worth a total of ₹186.1b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it’s clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, APAR Industries boasts net cash, so it’s fair to say it does not have a heavy debt load!

Notably, APAR Industries’s EBIT launched higher than Elon Musk, gaining a whopping 123% on last year. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine APAR 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, a business needs free cash flow to pay off debt; accounting profits just don’t cut it. APAR 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, APAR Industries’s free cash flow amounted to 40% of its EBIT, less than we’d expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

Although APAR Industries’s balance sheet isn’t particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of ₹1.74b. And we liked the look of last year’s 123% year-on-year EBIT growth. So we are not troubled with APAR Industries’s debt use. There’s no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We’ve spotted 1 warning sign for APAR Industries you should be aware of.

If, after all that, you’re more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

Valuation is complex, but we’re helping make it simple.

Find out whether APAR Industries is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

View the Free Analysis

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.

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