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

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. As with many other companies Crompton Greaves Consumer Electricals Limited (NSE:CROMPTON) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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. 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

What Is Crompton Greaves Consumer Electricals's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2022 Crompton Greaves Consumer Electricals had ₹15.5b of debt, an increase on ₹3.00b, over one year. However, it also had ₹10.2b in cash, and so its net debt is ₹5.29b.

A Look At Crompton Greaves Consumer Electricals' Liabilities

Zooming in on the latest balance sheet data, we can see that Crompton Greaves Consumer Electricals had liabilities of ₹19.4b due within 12 months and liabilities of ₹11.2b due beyond that. Offsetting this, it had ₹10.2b in cash and ₹6.48b in receivables that were due within 12 months. So its liabilities total ₹13.9b more than the combination of its cash and short-term receivables.

Of course, Crompton Greaves Consumer Electricals has a market capitalization of ₹225.9b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward.

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Crompton Greaves Consumer Electricals has a low net debt to EBITDA ratio of only 0.64. And its EBIT easily covers its interest expense, being 18.6 times the size. So we're pretty relaxed about its super-conservative use of debt. Fortunately, Crompton Greaves Consumer Electricals grew its EBIT by 3.7% in the last year, making that debt load look even more manageable. When analysing debt levels, the balance sheet is the obvious place to start. 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. So it's worth checking how much of that EBIT is backed by free cash flow. Over the last three years, Crompton Greaves Consumer Electricals recorded free cash flow worth a fulsome 84% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Our View

Crompton Greaves Consumer Electricals's interest cover suggests it can handle its debt as easily as Cristiano Ronaldo could score a goal against an under 14's goalkeeper. And that's just the beginning of the good news since its conversion of EBIT to free cash flow is also very heartening. Looking at the bigger picture, we think Crompton Greaves Consumer Electricals's use of debt seems quite reasonable and we're not concerned about it. While debt does bring risk, when used wisely it can also bring a higher return on equity. 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. For instance, we've identified 2 warning signs for Crompton Greaves Consumer Electricals that you should be aware of.

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.