We Think Godfrey Phillips India (NSE:GODFRYPHLP) Can Manage Its Debt With Ease

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. We can see that Godfrey Phillips India Limited (NSE:GODFRYPHLP) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. 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 Godfrey Phillips India

What Is Godfrey Phillips India's Debt?

The image below, which you can click on for greater detail, shows that at September 2021 Godfrey Phillips India had debt of ₹1.02b, up from ₹39.5m in one year. However, its balance sheet shows it holds ₹7.52b in cash, so it actually has ₹6.50b net cash.

How Strong Is Godfrey Phillips India's Balance Sheet?

The latest balance sheet data shows that Godfrey Phillips India had liabilities of ₹9.29b due within a year, and liabilities of ₹3.38b falling due after that. Offsetting this, it had ₹7.52b in cash and ₹937.3m in receivables that were due within 12 months. So it has liabilities totalling ₹4.21b more than its cash and near-term receivables, combined.

Since publicly traded Godfrey Phillips India shares are worth a total of ₹61.8b, it seems unlikely that this level of liabilities would be a major 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!

In addition to that, we're happy to report that Godfrey Phillips India has boosted its EBIT by 48%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Godfrey Phillips India will need earnings to service that debt. 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. 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. Over the most recent three years, Godfrey Phillips India recorded free cash flow worth 78% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Godfrey Phillips India has ₹6.50b in net cash. And it impressed us with its EBIT growth of 48% over the last year. So we don't think Godfrey Phillips India's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 1 warning sign for Godfrey Phillips India you should be aware of.

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.

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.

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