Is Colgate-Palmolive (India) (NSE:COLPAL) Using Too Much Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 Colgate-Palmolive (India) Limited (NSE:COLPAL) makes use of debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Colgate-Palmolive (India)

What Is Colgate-Palmolive (India)'s Net Debt?

You can click the graphic below for the historical numbers, but it shows that Colgate-Palmolive (India) had ₹911.8m of debt in March 2021, down from ₹1.01b, one year before. But it also has ₹2.97b in cash to offset that, meaning it has ₹2.05b net cash.

A Look At Colgate-Palmolive (India)'s Liabilities

The latest balance sheet data shows that Colgate-Palmolive (India) had liabilities of ₹16.2b due within a year, and liabilities of ₹1.10b falling due after that. Offsetting this, it had ₹2.97b in cash and ₹1.27b in receivables that were due within 12 months. So its liabilities total ₹13.0b more than the combination of its cash and short-term receivables.

Of course, Colgate-Palmolive (India) has a market capitalization of ₹461.9b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Colgate-Palmolive (India) boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Colgate-Palmolive (India) grew its EBIT by 34% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Colgate-Palmolive (India)'s earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Colgate-Palmolive (India) 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, Colgate-Palmolive (India) produced sturdy free cash flow equating to 71% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Colgate-Palmolive (India) has ₹2.05b in net cash. And it impressed us with its EBIT growth of 34% over the last year. So we don't think Colgate-Palmolive (India)'s use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 1 warning sign we've spotted with Colgate-Palmolive (India) .

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.
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