Is Crompton Greaves Consumer Electricals (NSE:CROMPTON) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 can see that Crompton Greaves Consumer Electricals Limited (NSE:CROMPTON) does use debt in its business. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at 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 ₹5.99b of debt in March 2024, down from ₹9.22b, one year before. But on the other hand it also has ₹9.41b in cash, leading to a ₹3.42b net cash position.

How Strong Is Crompton Greaves Consumer Electricals' Balance Sheet?

According to the last reported balance sheet, Crompton Greaves Consumer Electricals had liabilities of ₹20.6b due within 12 months, and liabilities of ₹5.69b due beyond 12 months. Offsetting these obligations, it had cash of ₹9.41b as well as receivables valued at ₹7.71b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹9.21b.

Of course, Crompton Greaves Consumer Electricals has a market capitalization of ₹285.0b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Crompton Greaves Consumer Electricals boasts net cash, so it's fair to say it does not have a heavy debt load!

On the other hand, Crompton Greaves Consumer Electricals's EBIT dived 11%, over the last year. If that rate of decline in earnings continues, the company could find itself in a tight spot. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Crompton Greaves Consumer Electricals 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, a company can only pay off debt with cold hard cash, not accounting profits. 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. Over the last three years, Crompton Greaves Consumer Electricals recorded free cash flow worth a fulsome 91% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

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 ₹3.42b in net cash. And it impressed us with free cash flow of ₹7.6b, being 91% 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. For example - Crompton Greaves Consumer Electricals has 1 warning sign we think 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.

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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.

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