Here's Why Greaves Cotton (NSE:GREAVESCOT) Has A Meaningful Debt Burden

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 note that Greaves Cotton Limited (NSE:GREAVESCOT) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Greaves Cotton

How Much Debt Does Greaves Cotton Carry?

You can click the graphic below for the historical numbers, but it shows that Greaves Cotton had ₹528.9m of debt in September 2023, down from ₹680.0m, one year before. But on the other hand it also has ₹8.44b in cash, leading to a ₹7.91b net cash position.

How Healthy Is Greaves Cotton's Balance Sheet?

The latest balance sheet data shows that Greaves Cotton had liabilities of ₹9.35b due within a year, and liabilities of ₹825.5m falling due after that. Offsetting this, it had ₹8.44b in cash and ₹2.34b in receivables that were due within 12 months. So it actually has ₹599.9m more liquid assets than total liabilities.

Having regard to Greaves Cotton's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the ₹34.6b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, Greaves Cotton boasts net cash, so it's fair to say it does not have a heavy debt load!

The modesty of its debt load may become crucial for Greaves Cotton if management cannot prevent a repeat of the 73% cut to EBIT over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Greaves Cotton can strengthen its balance sheet over time. 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. Greaves Cotton 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. During the last three years, Greaves Cotton burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Greaves Cotton has net cash of ₹7.91b, as well as more liquid assets than liabilities. So although we see some areas for improvement, we're not too worried about Greaves Cotton's balance sheet. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Greaves Cotton you should know about.

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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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.