Dabur India (NSE:DABUR) Could Easily Take On More Debt

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 Dabur India Limited (NSE:DABUR) makes use of debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Dabur India

How Much Debt Does Dabur India Carry?

As you can see below, Dabur India had ₹3.19b of debt, at March 2021, which is about the same as the year before. You can click the chart for greater detail. However, it does have ₹20.8b in cash offsetting this, leading to net cash of ₹17.6b.

How Strong Is Dabur India's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Dabur India had liabilities of ₹29.3b due within 12 months and liabilities of ₹2.13b due beyond that. Offsetting these obligations, it had cash of ₹20.8b as well as receivables valued at ₹5.79b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹4.93b.

Having regard to Dabur India's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the ₹923.9b company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, Dabur India also has more cash than debt, so we're pretty confident it can manage its debt safely.

Also good is that Dabur India grew its EBIT at 12% over the last year, further increasing its ability to manage debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Dabur India can strengthen its balance sheet over time. 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. While Dabur 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, Dabur India generated free cash flow amounting to a very robust 87% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing up

We could understand if investors are concerned about Dabur India's liabilities, but we can be reassured by the fact it has has net cash of ₹17.6b. And it impressed us with free cash flow of ₹18b, being 87% of its EBIT. So we don't think Dabur 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. For example, we've discovered 1 warning sign for Dabur India that you should be aware of before investing here.

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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