We Think ITC (NSE:ITC) Can Stay On Top Of Its Debt

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies ITC Limited (NSE:ITC) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, 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.

View our latest analysis for ITC

What Is ITC's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2024 ITC had debt of ₹267.8m, up from ₹45.3m in one year. But on the other hand it also has ₹191.0b in cash, leading to a ₹190.7b net cash position.

How Strong Is ITC's Balance Sheet?

We can see from the most recent balance sheet that ITC had liabilities of ₹149.6b falling due within a year, and liabilities of ₹33.2b due beyond that. Offsetting these obligations, it had cash of ₹191.0b as well as receivables valued at ₹58.3b due within 12 months. So it actually has ₹66.5b more liquid assets than total liabilities.

Having regard to ITC's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the ₹5.84t company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that ITC has more cash than debt is arguably a good indication that it can manage its debt safely.

While ITC doesn't seem to have gained much on the EBIT line, at least earnings remain stable for now. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if ITC 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. 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. During the last three years, ITC produced sturdy free cash flow equating to 61% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that ITC has net cash of ₹190.7b, as well as more liquid assets than liabilities. 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, we've discovered 1 warning sign for ITC that you should be aware of before investing here.

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.