Nestlé India (NSE:NESTLEIND) Has A Rock Solid Balance Sheet

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. We note that Nestlé India Limited (NSE:NESTLEIND) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. 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. 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Nestlé India

What Is Nestlé India's Net Debt?

As you can see below, Nestlé India had ₹340.6m of debt, at December 2021, which is about the same as the year before. You can click the chart for greater detail. However, its balance sheet shows it holds ₹7.82b in cash, so it actually has ₹7.48b net cash.

How Strong Is Nestlé India's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Nestlé India had liabilities of ₹26.0b due within 12 months and liabilities of ₹35.2b due beyond that. On the other hand, it had cash of ₹7.82b and ₹2.52b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹50.9b.

Since publicly traded Nestlé India shares are worth a very impressive total of ₹1.66t, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Nestlé India also has more cash than debt, so we're pretty confident it can manage its debt safely.

And we also note warmly that Nestlé India grew its EBIT by 12% last year, making its debt load easier to handle. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Nestlé India will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Nestlé India 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, Nestlé India produced sturdy free cash flow equating to 69% 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

We could understand if investors are concerned about Nestlé India's liabilities, but we can be reassured by the fact it has has net cash of ₹7.48b. The cherry on top was that in converted 69% of that EBIT to free cash flow, bringing in ₹15b. So we don't think Nestlé India'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. To that end, you should be aware of the 1 warning sign we've spotted with Nestlé India .

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.