Is Relaxo Footwears (NSE:RELAXO) A Risky Investment?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 Relaxo Footwears Limited (NSE:RELAXO) does use debt in its business. But the real question is whether this debt is making the company risky.

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. 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, 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 step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Relaxo Footwears

What Is Relaxo Footwears's Debt?

As you can see below, at the end of September 2023, Relaxo Footwears had ₹379.4m of debt, up from ₹245.9m a year ago. Click the image for more detail. But it also has ₹2.42b in cash to offset that, meaning it has ₹2.04b net cash.

A Look At Relaxo Footwears' Liabilities

The latest balance sheet data shows that Relaxo Footwears had liabilities of ₹5.37b due within a year, and liabilities of ₹1.88b falling due after that. On the other hand, it had cash of ₹2.42b and ₹3.26b worth of receivables due within a year. So it has liabilities totalling ₹1.58b more than its cash and near-term receivables, combined.

Having regard to Relaxo Footwears' size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the ₹226.0b company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Relaxo Footwears boasts net cash, so it's fair to say it does not have a heavy debt load!

While Relaxo Footwears doesn't seem to have gained much on the EBIT line, at least earnings remain stable for now. 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 Relaxo Footwears'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 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. Looking at the most recent three years, Relaxo Footwears recorded free cash flow of 37% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Relaxo Footwears has ₹2.04b in net cash. So we don't have any problem with Relaxo Footwears's use of debt. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Relaxo Footwears's earnings per share history for free.

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.