We Think Tata Consumer Products (NSE:TATACONSUM) Can Manage Its Debt With Ease

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Tata Consumer Products Limited (NSE:TATACONSUM) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Tata Consumer Products

What Is Tata Consumer Products's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Tata Consumer Products had ₹11.7b of debt in September 2021, down from ₹14.6b, one year before. But on the other hand it also has ₹27.4b in cash, leading to a ₹15.7b net cash position.

How Healthy Is Tata Consumer Products' Balance Sheet?

According to the last reported balance sheet, Tata Consumer Products had liabilities of ₹25.1b due within 12 months, and liabilities of ₹15.9b due beyond 12 months. Offsetting this, it had ₹27.4b in cash and ₹8.77b in receivables that were due within 12 months. So it has liabilities totalling ₹4.79b 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 ₹684.5b 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.

While Tata Consumer Products doesn't seem to have gained much on the EBIT line, at least earnings remain stable for now. There's no doubt that we learn most about debt from the balance sheet. 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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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. Over the last three years, Tata Consumer Products recorded free cash flow worth a fulsome 97% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Tata Consumer Products has ₹15.7b in net cash. The cherry on top was that in converted 97% of that EBIT to free cash flow, bringing in ₹14b. So is Tata Consumer Products's debt a risk? It doesn't seem so to us. 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.

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.