Is Bajaj Consumer Care (NSE:BAJAJCON) A Risky Investment?

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. We note that Bajaj Consumer Care Limited (NSE:BAJAJCON) does have debt on its balance sheet. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Bajaj Consumer Care

What Is Bajaj Consumer Care's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Bajaj Consumer Care had ₹124.6m of debt in September 2020, down from ₹686.1m, one year before. But on the other hand it also has ₹5.43b in cash, leading to a ₹5.31b net cash position.

How Healthy Is Bajaj Consumer Care's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Bajaj Consumer Care had liabilities of ₹1.50b due within 12 months and no liabilities due beyond that. On the other hand, it had cash of ₹5.43b and ₹224.4m worth of receivables due within a year. So it actually has ₹4.15b more liquid assets than total liabilities.

This short term liquidity is a sign that Bajaj Consumer Care could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Bajaj Consumer Care boasts net cash, so it's fair to say it does not have a heavy debt load!

But the bad news is that Bajaj Consumer Care has seen its EBIT plunge 19% in the last twelve months. If that rate of decline in earnings continues, the company could find itself in a tight spot. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Bajaj Consumer Care's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Bajaj Consumer Care 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, Bajaj Consumer Care produced sturdy free cash flow equating to 75% 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 we empathize with investors who find debt concerning, you should keep in mind that Bajaj Consumer Care has net cash of ₹5.31b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of ₹2.1b, being 75% of its EBIT. So we don't have any problem with Bajaj Consumer Care's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 2 warning signs for Bajaj Consumer Care that you should be aware of before investing here.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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