Relaxo Footwears (NSE:RELAXO) Seems To Use Debt Quite Sensibly

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. Importantly, Relaxo Footwears Limited (NSE:RELAXO) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Relaxo Footwears

What Is Relaxo Footwears's Net Debt?

The image below, which you can click on for greater detail, shows that at March 2024 Relaxo Footwears had debt of ₹185.4m, up from none in one year. But it also has ₹1.81b in cash to offset that, meaning it has ₹1.62b net cash.

How Healthy Is Relaxo Footwears' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Relaxo Footwears had liabilities of ₹5.19b due within 12 months and liabilities of ₹1.93b due beyond that. On the other hand, it had cash of ₹1.81b and ₹3.58b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹1.74b.

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 ₹196.6b 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!

Another good sign is that Relaxo Footwears has been able to increase its EBIT by 22% in twelve months, making it easier to pay down debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Relaxo Footwears can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

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. Over the last three years, Relaxo Footwears reported free cash flow worth 15% of its EBIT, which is really quite low. That limp level of cash conversion undermines its ability to manage and pay down debt.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Relaxo Footwears has ₹1.62b in net cash. And it impressed us with its EBIT growth of 22% over the last year. So we don't have any problem with Relaxo Footwears's use of debt. 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. Case in point: We've spotted 1 warning sign for Relaxo Footwears you should be aware of.

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.