These 4 Measures Indicate That Colgate-Palmolive (India) (NSE:COLPAL) Is Using Debt Safely

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. Importantly, Colgate-Palmolive (India) Limited (NSE:COLPAL) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Colgate-Palmolive (India)

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

The image below, which you can click on for greater detail, shows that at March 2024 Colgate-Palmolive (India) had debt of ₹717.5m, up from ₹689.6m in one year. But it also has ₹8.89b in cash to offset that, meaning it has ₹8.17b net cash.

How Healthy Is Colgate-Palmolive (India)'s Balance Sheet?

We can see from the most recent balance sheet that Colgate-Palmolive (India) had liabilities of ₹12.4b falling due within a year, and liabilities of ₹828.2m due beyond that. Offsetting this, it had ₹8.89b in cash and ₹1.77b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹2.56b.

This state of affairs indicates that Colgate-Palmolive (India)'s balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the ₹1.03t company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, Colgate-Palmolive (India) also has more cash than debt, so we're pretty confident it can manage its debt safely.

Another good sign is that Colgate-Palmolive (India) 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 Colgate-Palmolive (India)'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. Colgate-Palmolive (India) 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, Colgate-Palmolive (India) produced sturdy free cash flow equating to 79% 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

We could understand if investors are concerned about Colgate-Palmolive (India)'s liabilities, but we can be reassured by the fact it has has net cash of ₹8.17b. The cherry on top was that in converted 79% of that EBIT to free cash flow, bringing in ₹11b. So is Colgate-Palmolive (India)'s debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 1 warning sign for Colgate-Palmolive (India) that you should be aware of.

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.