Dabur India (NSE:DABUR) Seems To Use Debt Rather Sparingly

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 Dabur India Limited (NSE:DABUR) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Dabur India

How Much Debt Does Dabur India Carry?

As you can see below, Dabur India had ₹3.50b of debt at March 2021, down from ₹4.67b a year prior. But on the other hand it also has ₹20.6b in cash, leading to a ₹17.1b net cash position.

A Look At Dabur India's Liabilities

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 ₹20.6b as well as receivables valued at ₹5.79b due within 12 months. So its liabilities total ₹5.04b more than the combination of its cash and short-term receivables.

This state of affairs indicates that Dabur India's 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 ₹1.03t company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, Dabur India boasts net cash, so it's fair to say it does not have a heavy debt load!

Also positive, Dabur India grew its EBIT by 25% in the last year, and that should make it easier to pay down debt, going forward. 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 Dabur 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Dabur 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, Dabur India generated free cash flow amounting to a very robust 89% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Dabur India has ₹17.1b in net cash. And it impressed us with free cash flow of ₹18b, being 89% of its EBIT. So we don't think Dabur India's use of debt is risky. 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 - Dabur India has 1 warning sign we think 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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