Stock Analysis

These 4 Measures Indicate That Britannia Industries (NSE:BRITANNIA) Is Using Debt Safely

NSEI:BRITANNIA
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Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 Britannia Industries Limited (NSE:BRITANNIA) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. 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, 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 Britannia Industries

How Much Debt Does Britannia Industries Carry?

The image below, which you can click on for greater detail, shows that Britannia Industries had debt of ₹27.6b at the end of September 2023, a reduction from ₹30.2b over a year. However, it does have ₹8.47b in cash offsetting this, leading to net debt of about ₹19.1b.

debt-equity-history-analysis
NSEI:BRITANNIA Debt to Equity History November 7th 2023

How Healthy Is Britannia Industries' Balance Sheet?

We can see from the most recent balance sheet that Britannia Industries had liabilities of ₹49.7b falling due within a year, and liabilities of ₹9.04b due beyond that. Offsetting this, it had ₹8.47b in cash and ₹11.1b in receivables that were due within 12 months. So its liabilities total ₹39.2b more than the combination of its cash and short-term receivables.

Given Britannia Industries has a humongous market capitalization of ₹1.11t, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time.

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). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

Britannia Industries's net debt is only 0.60 times its EBITDA. And its EBIT covers its interest expense a whopping 226 times over. So we're pretty relaxed about its super-conservative use of debt. In addition to that, we're happy to report that Britannia Industries has boosted its EBIT by 39%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Britannia Industries'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. So the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. During the last three years, Britannia Industries produced sturdy free cash flow equating to 60% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Our View

Happily, Britannia Industries's impressive interest cover implies it has the upper hand on its debt. And that's just the beginning of the good news since its EBIT growth rate is also very heartening. Overall, we don't think Britannia Industries is taking any bad risks, as its debt load seems modest. So we're not worried about the use of a little leverage on the balance sheet. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Britannia Industries has 2 warning signs 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.

Valuation is complex, but we're here to simplify it.

Discover if Britannia Industries might be undervalued or overvalued with our detailed analysis, featuring fair value estimates, potential risks, dividends, insider trades, and its financial condition.

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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.

About NSEI:BRITANNIA

Britannia Industries

Manufactures and sells various food products in India and internationally.

Adequate balance sheet average dividend payer.

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