Here's Why Marico (NSE:MARICO) Can Manage Its Debt Responsibly

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 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. Importantly, Marico Limited (NSE:MARICO) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

See 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 ₹3.39b in debt in September 2024; about the same as the year before. But on the other hand it also has ₹14.5b in cash, leading to a ₹11.1b net cash position.

How Strong Is Marico's Balance Sheet?

We can see from the most recent balance sheet that Marico had liabilities of ₹23.5b falling due within a year, and liabilities of ₹8.23b due beyond that. On the other hand, it had cash of ₹14.5b and ₹13.1b worth of receivables due within a year. So its liabilities total ₹4.08b more than the combination of its cash and short-term receivables.

Having regard to Marico's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the ₹770.6b company is short on cash, but still worth keeping an eye on the 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.

The good news is that Marico has increased its EBIT by 9.8% over twelve months, which should ease any concerns about debt repayment. When analysing debt levels, the balance sheet is the obvious place to start. 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, a company can only pay off debt with cold hard cash, not accounting profits. Marico 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, Marico recorded free cash flow worth 61% 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 Marico has ₹11.1b in net cash. So is Marico'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. To that end, you should learn about the 2 warning signs we've spotted with Marico (including 1 which shouldn't be ignored) .

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.