These 4 Measures Indicate That Godfrey Phillips India (NSE:GODFRYPHLP) Is Using Debt Safely

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

See 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 as of March 2023 Godfrey Phillips India had ₹358.5m of debt, an increase on ₹308.9m, over one year. However, it does have ₹1.79b in cash offsetting this, leading to net cash of ₹1.43b.

A Look At Godfrey Phillips India's Liabilities

The latest balance sheet data shows that Godfrey Phillips India had liabilities of ₹10.4b due within a year, and liabilities of ₹3.75b falling due after that. Offsetting these obligations, it had cash of ₹1.79b as well as receivables valued at ₹1.51b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹10.9b.

Of course, Godfrey Phillips India has a market capitalization of ₹88.7b, 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. Despite its noteworthy liabilities, Godfrey Phillips India boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Godfrey Phillips India grew its EBIT by 32% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Godfrey Phillips India's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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. During the last three years, Godfrey Phillips India generated free cash flow amounting to a very robust 84% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing Up

While Godfrey Phillips India does have more liabilities than liquid assets, it also has net cash of ₹1.43b. The cherry on top was that in converted 84% of that EBIT to free cash flow, bringing in ₹7.3b. So we don't think Godfrey Phillips India's use of debt is risky. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Godfrey Phillips India's earnings per share history for free.

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.