Is Godfrey Phillips India (NSE:GODFRYPHLP) Using Too Much 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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Godfrey Phillips India Limited (NSE:GODFRYPHLP) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. 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. 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.

Check out our latest analysis for Godfrey Phillips India

What Is Godfrey Phillips India's Debt?

As you can see below, Godfrey Phillips India had ₹311.4m of debt at September 2024, down from ₹3.47b a year prior. However, its balance sheet shows it holds ₹1.58b in cash, so it actually has ₹1.27b net cash.

How Healthy Is Godfrey Phillips India's Balance Sheet?

According to the last reported balance sheet, Godfrey Phillips India had liabilities of ₹14.3b due within 12 months, and liabilities of ₹3.39b due beyond 12 months. Offsetting this, it had ₹1.58b in cash and ₹5.15b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹10.9b.

Since publicly traded Godfrey Phillips India shares are worth a total of ₹310.9b, it seems unlikely that this level of liabilities would be a major threat. 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.

On top of that, Godfrey Phillips India grew its EBIT by 31% over the last twelve months, and that growth will make it easier to handle its 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 Godfrey Phillips India can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Godfrey Phillips India may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. In the last three years, Godfrey Phillips India's free cash flow amounted to 22% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

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 ₹1.27b. And it impressed us with its EBIT growth of 31% over the last year. So is Godfrey Phillips India's debt a risk? It doesn't seem so to us. 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 Godfrey Phillips India has 2 warning signs (and 1 which is concerning) we think you should know about.

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.