Crompton Greaves Consumer Electricals (NSE:CROMPTON) Could Easily Take On More Debt

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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. Importantly, Crompton Greaves Consumer Electricals Limited (NSE:CROMPTON) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Crompton Greaves Consumer Electricals

What Is Crompton Greaves Consumer Electricals's Debt?

You can click the graphic below for the historical numbers, but it shows that Crompton Greaves Consumer Electricals had ₹3.00b of debt in September 2021, down from ₹5.14b, one year before. But it also has ₹12.0b in cash to offset that, meaning it has ₹9.02b net cash.

How Strong Is Crompton Greaves Consumer Electricals' Balance Sheet?

We can see from the most recent balance sheet that Crompton Greaves Consumer Electricals had liabilities of ₹11.8b falling due within a year, and liabilities of ₹2.03b due beyond that. Offsetting this, it had ₹12.0b in cash and ₹4.78b in receivables that were due within 12 months. So it can boast ₹2.98b more liquid assets than total liabilities.

Having regard to Crompton Greaves Consumer Electricals' size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the ₹306.5b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, Crompton Greaves Consumer Electricals boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Crompton Greaves Consumer Electricals grew its EBIT by 36% over the last twelve months, and that growth will make it easier to handle its debt. 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 Crompton Greaves Consumer Electricals's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Crompton Greaves Consumer Electricals has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, Crompton Greaves Consumer Electricals produced sturdy free cash flow equating to 77% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

While it is always sensible to investigate a company's debt, in this case Crompton Greaves Consumer Electricals has ₹9.02b in net cash and a decent-looking balance sheet. And we liked the look of last year's 36% year-on-year EBIT growth. So is Crompton Greaves Consumer Electricals's debt a risk? It doesn't seem so to us. 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. For example, we've discovered 2 warning signs for Crompton Greaves Consumer Electricals that you should be aware of before investing here.

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.

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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