Does Crompton Greaves Consumer Electricals (NSE:CROMPTON) Have A Healthy Balance Sheet?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. We can see that Crompton Greaves Consumer Electricals Limited (NSE:CROMPTON) does use debt in its business. 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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Crompton Greaves Consumer Electricals

How Much Debt Does Crompton Greaves Consumer Electricals Carry?

As you can see below, Crompton Greaves Consumer Electricals had ₹3.00b of debt at September 2024, down from ₹9.23b a year prior. But it also has ₹5.43b in cash to offset that, meaning it has ₹2.43b net cash.

A Look At Crompton Greaves Consumer Electricals' Liabilities

We can see from the most recent balance sheet that Crompton Greaves Consumer Electricals had liabilities of ₹17.7b falling due within a year, and liabilities of ₹3.88b due beyond that. Offsetting these obligations, it had cash of ₹5.43b as well as receivables valued at ₹6.45b due within 12 months. So its liabilities total ₹9.68b more than the combination of its cash and short-term receivables.

Since publicly traded Crompton Greaves Consumer Electricals shares are worth a total of ₹229.9b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Crompton Greaves Consumer Electricals also has more cash than debt, so we're pretty confident it can manage its debt safely.

Fortunately, Crompton Greaves Consumer Electricals grew its EBIT by 8.4% in the last year, making that debt load look even more manageable. 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're focused on the future you can check out this free report showing analyst profit forecasts.

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 generated free cash flow amounting to a very robust 86% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Crompton Greaves Consumer Electricals has ₹2.43b in net cash. And it impressed us with free cash flow of ₹6.8b, being 86% of its EBIT. So is Crompton Greaves Consumer Electricals's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Crompton Greaves Consumer Electricals is showing 1 warning sign in our investment analysis , you should know about...

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.