Is Relaxo Footwears (NSE:RELAXO) Using Too Much Debt?

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 Relaxo Footwears Limited (NSE:RELAXO) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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.

See our latest analysis for Relaxo Footwears

What Is Relaxo Footwears's Debt?

The image below, which you can click on for greater detail, shows that at September 2022 Relaxo Footwears had debt of ₹245.9m, up from ₹21.1m in one year. But it also has ₹1.64b in cash to offset that, meaning it has ₹1.40b net cash.

A Look At Relaxo Footwears' Liabilities

Zooming in on the latest balance sheet data, we can see that Relaxo Footwears had liabilities of ₹4.58b due within 12 months and liabilities of ₹1.60b due beyond that. Offsetting these obligations, it had cash of ₹1.64b as well as receivables valued at ₹2.71b due within 12 months. So its liabilities total ₹1.82b more than the combination of its cash and short-term receivables.

Having regard to Relaxo Footwears' size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the ₹233.7b company is struggling for cash, we still think it's worth monitoring its 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!

It is just as well that Relaxo Footwears's load is not too heavy, because its EBIT was down 32% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. The balance sheet is clearly the area to focus on when you are analysing debt. 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 53% 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 ₹1.40b. So we are not troubled with Relaxo Footwears's debt use. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for Relaxo Footwears that you should be aware of.

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.