Is Godfrey Phillips India (NSE:GODFRYPHLP) 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.' 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, Godfrey Phillips India Limited (NSE:GODFRYPHLP) does carry debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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 examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Godfrey Phillips India

What Is Godfrey Phillips India's Debt?

You can click the graphic below for the historical numbers, but it shows that Godfrey Phillips India had ₹368.4m of debt in September 2022, down from ₹1.02b, one year before. But on the other hand it also has ₹5.00b in cash, leading to a ₹4.64b net cash position.

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 ₹10.1b falling due within a year, and liabilities of ₹3.59b due beyond that. On the other hand, it had cash of ₹5.00b and ₹1.68b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹6.99b.

Of course, Godfrey Phillips India has a market capitalization of ₹110.5b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Godfrey Phillips India also has more cash than debt, so we're pretty confident it can manage its debt safely.

In addition to that, we're happy to report that Godfrey Phillips India has boosted its EBIT by 32%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But it is Godfrey Phillips India's earnings that will influence how the balance sheet holds up in the future. 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 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 generated free cash flow amounting to a very robust 85% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing Up

We could understand if investors are concerned about Godfrey Phillips India's liabilities, but we can be reassured by the fact it has has net cash of ₹4.64b. And it impressed us with free cash flow of ₹5.3b, being 85% of its EBIT. So is Godfrey Phillips India's debt a risk? It doesn't seem so to us. 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 you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.