Tata Consumer Products (NSE:TATACONSUM) Has A Rock Solid Balance Sheet

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. As with many other companies Tata Consumer Products Limited (NSE:TATACONSUM) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Tata Consumer Products

What Is Tata Consumer Products's Debt?

The image below, which you can click on for greater detail, shows that Tata Consumer Products had debt of ₹12.3b at the end of March 2021, a reduction from ₹12.9b over a year. However, its balance sheet shows it holds ₹34.1b in cash, so it actually has ₹21.8b net cash.

How Strong Is Tata Consumer Products' Balance Sheet?

We can see from the most recent balance sheet that Tata Consumer Products had liabilities of ₹30.9b falling due within a year, and liabilities of ₹15.3b due beyond that. On the other hand, it had cash of ₹34.1b and ₹12.3b worth of receivables due within a year. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.

Having regard to Tata Consumer Products' size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the ₹715.0b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Tata Consumer Products boasts net cash, so it's fair to say it does not have a heavy debt load!

Another good sign is that Tata Consumer Products has been able to increase its EBIT by 24% in twelve months, making it easier to pay down debt. When analysing debt levels, the balance sheet is the obvious place to start. 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 produced sturdy free cash flow equating to 77% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing up

While it is always sensible to investigate a company's debt, in this case Tata Consumer Products has ₹21.8b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of ₹14b, being 77% 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.

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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