These 4 Measures Indicate That Crompton Greaves Consumer Electricals (NSE:CROMPTON) Is Using Debt Safely

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 note that Crompton Greaves Consumer Electricals Limited (NSE:CROMPTON) does have debt on its balance sheet. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Crompton Greaves Consumer Electricals

How Much Debt Does Crompton Greaves Consumer Electricals Carry?

The image below, which you can click on for greater detail, shows that Crompton Greaves Consumer Electricals had debt of ₹3.52b at the end of September 2021, a reduction from ₹5.99b over a year. But it also has ₹12.0b in cash to offset that, meaning it has ₹8.50b net cash.

How Healthy Is Crompton Greaves Consumer Electricals' Balance Sheet?

The latest balance sheet data shows that Crompton Greaves Consumer Electricals had liabilities of ₹11.8b due within a year, and liabilities of ₹2.03b falling due after that. Offsetting these obligations, it had cash of ₹12.0b as well as receivables valued at ₹4.78b due within 12 months. So it actually has ₹2.98b more liquid assets than total liabilities.

This state of affairs indicates that Crompton Greaves Consumer Electricals' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the ₹238.7b company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that Crompton Greaves Consumer Electricals has more cash than debt is arguably a good indication that it can manage its debt safely.

Also positive, Crompton Greaves Consumer Electricals grew its EBIT by 22% in the last year, and that should make it easier to pay down debt, going forward. There's no doubt that we learn most about debt from the balance sheet. 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.

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. Over the most recent three years, Crompton Greaves Consumer Electricals recorded free cash flow worth 79% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Crompton Greaves Consumer Electricals has net cash of ₹8.50b, as well as more liquid assets than liabilities. The cherry on top was that in converted 79% of that EBIT to free cash flow, bringing in ₹4.6b. So we don't think Crompton Greaves Consumer Electricals's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 2 warning signs we've spotted with Crompton Greaves Consumer Electricals .

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.