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

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, Marico Limited (NSE:MARICO) does carry debt. But should shareholders be worried about its use of debt?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Marico

What Is Marico's Debt?

The image below, which you can click on for greater detail, shows that at September 2022 Marico had debt of ₹3.93b, up from ₹3.23b in one year. However, its balance sheet shows it holds ₹17.0b in cash, so it actually has ₹13.0b net cash.

A Look At Marico's Liabilities

According to the last reported balance sheet, Marico had liabilities of ₹26.0b due within 12 months, and liabilities of ₹5.34b due beyond 12 months. Offsetting these obligations, it had cash of ₹17.0b as well as receivables valued at ₹9.95b due within 12 months. So its liabilities total ₹4.42b 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 it's very unlikely that the ₹671.1b company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Marico boasts net cash, so it's fair to say it does not have a heavy debt load!

Fortunately, Marico grew its EBIT by 6.1% in the last year, making that debt load look even more manageable. The balance sheet is clearly the area to focus on when you are analysing debt. 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'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. 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 last three years, Marico recorded free cash flow worth a fulsome 80% 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

While it is always sensible to look at a company's total liabilities, it is very reassuring that Marico has ₹13.0b in net cash. The cherry on top was that in converted 80% of that EBIT to free cash flow, bringing in ₹10b. So we don't think Marico's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. We've identified 1 warning sign with Marico , and understanding them should be part of your investment process.

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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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.