Godfrey Phillips India (NSE:GODFRYPHLP) Could Easily Take On More Debt

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. We can see that Godfrey Phillips India Limited (NSE:GODFRYPHLP) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Godfrey Phillips India

How Much Debt Does Godfrey Phillips India Carry?

The image below, which you can click on for greater detail, shows that Godfrey Phillips India had debt of ₹308.8m at the end of March 2022, a reduction from ₹759.0m over a year. But it also has ₹5.20b in cash to offset that, meaning it has ₹4.89b net cash.

How Healthy Is Godfrey Phillips India's Balance Sheet?

We can see from the most recent balance sheet that Godfrey Phillips India had liabilities of ₹8.22b falling due within a year, and liabilities of ₹3.46b due beyond that. On the other hand, it had cash of ₹5.20b and ₹1.56b worth of receivables due within a year. So its liabilities total ₹4.92b more than the combination of its cash and short-term receivables.

Given Godfrey Phillips India has a market capitalization of ₹58.1b, 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. Despite its noteworthy liabilities, Godfrey Phillips India boasts net cash, so it's fair to say it does not have a heavy debt load!

Also positive, Godfrey Phillips India grew its EBIT by 20% in the last year, and that should make it easier to pay down debt, going forward. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Godfrey Phillips India will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Godfrey Phillips India 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, Godfrey Phillips India produced sturdy free cash flow equating to 62% 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

While it is always sensible to look at a company's total liabilities, it is very reassuring that Godfrey Phillips India has ₹4.89b in net cash. And we liked the look of last year's 20% year-on-year EBIT growth. So we don't think Godfrey Phillips India's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in Godfrey Phillips India, you may well want to click here to check an interactive graph of its earnings per share history.

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.