Stock Analysis

These 4 Measures Indicate That Radico Khaitan (NSE:RADICO) Is Using Debt Reasonably Well

NSEI:RADICO
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Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We can see that Radico Khaitan Limited (NSE:RADICO) does use debt in its business. 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. If things get really bad, the lenders can take control of the business. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Radico Khaitan

How Much Debt Does Radico Khaitan Carry?

You can click the graphic below for the historical numbers, but it shows that Radico Khaitan had ₹1.91b of debt in September 2021, down from ₹3.10b, one year before. However, it also had ₹743.1m in cash, and so its net debt is ₹1.16b.

debt-equity-history-analysis
NSEI:RADICO Debt to Equity History December 24th 2021

How Healthy Is Radico Khaitan's Balance Sheet?

According to the last reported balance sheet, Radico Khaitan had liabilities of ₹7.23b due within 12 months, and liabilities of ₹989.1m due beyond 12 months. Offsetting these obligations, it had cash of ₹743.1m as well as receivables valued at ₹9.29b due within 12 months. So it can boast ₹1.82b more liquid assets than total liabilities.

Having regard to Radico Khaitan's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the ₹157.5b company is short on cash, but still worth keeping an eye on the balance sheet. Carrying virtually no net debt, Radico Khaitan has a very light debt load indeed.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Radico Khaitan has a low net debt to EBITDA ratio of only 0.27. And its EBIT covers its interest expense a whopping 159 times over. So you could argue it is no more threatened by its debt than an elephant is by a mouse. Also good is that Radico Khaitan grew its EBIT at 19% over the last year, further increasing its ability to manage debt. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Radico Khaitan will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. In the last three years, Radico Khaitan's free cash flow amounted to 33% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Our View

Radico Khaitan's interest cover suggests it can handle its debt as easily as Cristiano Ronaldo could score a goal against an under 14's goalkeeper. But, on a more sombre note, we are a little concerned by its conversion of EBIT to free cash flow. Looking at the bigger picture, we think Radico Khaitan's use of debt seems quite reasonable and we're not concerned about it. After all, sensible leverage can boost returns on equity. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 1 warning sign for Radico Khaitan that you should be aware of before investing here.

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.