Does Marico (NSE:MARICO) Have A Healthy Balance Sheet?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Marico Limited (NSE:MARICO) makes use of debt. But should shareholders be worried about its use of debt?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Marico

What Is Marico's Debt?

The chart below, which you can click on for greater detail, shows that Marico had ₹4.79b in debt in March 2022; about the same as the year before. But on the other hand it also has ₹12.2b in cash, leading to a ₹7.41b net cash position.

How Healthy Is Marico's Balance Sheet?

The latest balance sheet data shows that Marico had liabilities of ₹21.5b due within a year, and liabilities of ₹2.28b falling due after that. Offsetting this, it had ₹12.2b in cash and ₹7.31b in receivables that were due within 12 months. So it has liabilities totalling ₹4.30b more than its cash and near-term receivables, combined.

Having regard to Marico's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the ₹710.6b company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, Marico also has more cash than debt, so we're pretty confident it can manage its debt safely.

Fortunately, Marico grew its EBIT by 8.2% in the last year, making that debt load look even more manageable. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Marico'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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Marico has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, Marico recorded free cash flow worth a fulsome 82% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing Up

We could understand if investors are concerned about Marico's liabilities, but we can be reassured by the fact it has has net cash of ₹7.41b. And it impressed us with free cash flow of ₹8.8b, being 82% of its EBIT. So is Marico's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for Marico (1 shouldn't be ignored) you should be aware of.

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.