Stock Analysis

We Think ITC (NSE:ITC) Can Manage Its Debt With Ease

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David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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, ITC Limited (NSE:ITC) does carry debt. But should shareholders be worried about its use of debt?

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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for ITC

What Is ITC's Debt?

As you can see below, ITC had ₹2.53b of debt at September 2022, down from ₹2.69b a year prior. However, it does have ₹163.0b in cash offsetting this, leading to net cash of ₹160.5b.

NSEI:ITC Debt to Equity History March 13th 2023

A Look At ITC's Liabilities

According to the last reported balance sheet, ITC had liabilities of ₹133.3b due within 12 months, and liabilities of ₹26.9b due beyond 12 months. On the other hand, it had cash of ₹163.0b and ₹27.2b worth of receivables due within a year. So it can boast ₹29.9b more liquid assets than total liabilities.

This state of affairs indicates that ITC's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the ₹4.82t company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, ITC boasts net cash, so it's fair to say it does not have a heavy debt load!

Also positive, ITC grew its EBIT by 24% in the last year, and that should make it easier to pay down debt, going forward. 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 ITC can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. ITC 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, ITC recorded free cash flow worth 68% of its EBIT, which is around normal, given free cash flow excludes interest and tax. 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 investigate a company's debt, in this case ITC has ₹160.5b in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 24% over the last year. So is ITC's debt a risk? It doesn't seem so to us. 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. For example - ITC has 1 warning sign we think you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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