Does Relaxo Footwears (NSE:RELAXO) Have A Healthy Balance Sheet?

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 note that Relaxo Footwears Limited (NSE:RELAXO) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Relaxo Footwears

How Much Debt Does Relaxo Footwears Carry?

You can click the graphic below for the historical numbers, but it shows that as of March 2022 Relaxo Footwears had ₹200.0m of debt, an increase on none, over one year. But on the other hand it also has ₹1.82b in cash, leading to a ₹1.62b net cash position.

How Strong Is Relaxo Footwears' Balance Sheet?

The latest balance sheet data shows that Relaxo Footwears had liabilities of ₹4.61b due within a year, and liabilities of ₹1.61b falling due after that. Offsetting this, it had ₹1.82b in cash and ₹2.52b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹1.89b.

This state of affairs indicates that Relaxo Footwears' 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 ₹249.2b company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, Relaxo Footwears also has more cash than debt, so we're pretty confident it can manage its debt safely.

It is just as well that Relaxo Footwears's load is not too heavy, because its EBIT was down 22% over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Relaxo Footwears will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Relaxo Footwears 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, Relaxo Footwears produced sturdy free cash flow equating to 51% 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

We could understand if investors are concerned about Relaxo Footwears's liabilities, but we can be reassured by the fact it has has net cash of ₹1.62b. So we are not troubled with Relaxo Footwears's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example - Relaxo Footwears has 1 warning sign we think you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.