Tata Consumer Products (NSE:TATACONSUM) Could Easily Take On More Debt

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. As with many other companies Tata Consumer Products Limited (NSE:TATACONSUM) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Tata Consumer Products

What Is Tata Consumer Products's Net Debt?

The image below, which you can click on for greater detail, shows that Tata Consumer Products had debt of ₹10.2b at the end of March 2022, a reduction from ₹12.3b over a year. But on the other hand it also has ₹28.4b in cash, leading to a ₹18.2b net cash position.

A Look At Tata Consumer Products' Liabilities

According to the last reported balance sheet, Tata Consumer Products had liabilities of ₹31.7b due within 12 months, and liabilities of ₹16.5b due beyond 12 months. On the other hand, it had cash of ₹28.4b and ₹18.1b worth of receivables due within a year. So it has liabilities totalling ₹1.77b more than its cash and near-term receivables, combined.

This state of affairs indicates that Tata Consumer Products' 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 ₹728.5b company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, Tata Consumer Products also has more cash than debt, so we're pretty confident it can manage its debt safely.

Also good is that Tata Consumer Products grew its EBIT at 11% over the last year, further increasing its ability to manage debt. 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 Tata Consumer Products'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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Tata Consumer Products has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, Tata Consumer Products generated free cash flow amounting to a very robust 97% of its EBIT, more than we'd 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 Tata Consumer Products has ₹18.2b in net cash. And it impressed us with free cash flow of ₹12b, being 97% of its EBIT. So we don't think Tata Consumer Products's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in Tata Consumer Products, you may well want to click here to check an interactive graph of its earnings per share history.

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.