Marico (NSE:MARICO) Has A Rock Solid 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.' 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. We can see that Marico Limited (NSE:MARICO) does use debt in its business. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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. 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 Marico

How Much Debt Does Marico Carry?

The image below, which you can click on for greater detail, shows that at March 2023 Marico had debt of ₹6.08b, up from ₹4.79b in one year. However, its balance sheet shows it holds ₹13.3b in cash, so it actually has ₹7.25b net cash.

A Look At Marico's Liabilities

Zooming in on the latest balance sheet data, we can see that Marico had liabilities of ₹24.3b due within 12 months and liabilities of ₹5.61b due beyond that. Offsetting this, it had ₹13.3b in cash and ₹10.9b in receivables that were due within 12 months. So its liabilities total ₹5.66b more than the combination of its cash and short-term receivables.

This state of affairs indicates that Marico'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 ₹750.5b 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.

The good news is that Marico has increased its EBIT by 7.5% 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 ultimately the future profitability of the business will decide if Marico 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. 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. During the last three years, Marico generated free cash flow amounting to a very robust 80% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

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 ₹7.25b. And it impressed us with free cash flow of ₹12b, being 80% of its EBIT. So we don't think Marico's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Marico you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.