Is Dabur India (NSE:DABUR) A Risky Investment?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Dabur India Limited (NSE:DABUR) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt A Problem?

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 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Dabur India

How Much Debt Does Dabur India Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2023 Dabur India had ₹13.1b of debt, an increase on ₹9.05b, over one year. However, its balance sheet shows it holds ₹21.7b in cash, so it actually has ₹8.60b net cash.

A Look At Dabur India's Liabilities

According to the last reported balance sheet, Dabur India had liabilities of ₹39.6b due within 12 months, and liabilities of ₹8.69b due beyond 12 months. Offsetting these obligations, it had cash of ₹21.7b as well as receivables valued at ₹11.5b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹15.0b.

Having regard to Dabur India's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the ₹957.5b company is short on cash, but still worth keeping an eye on the 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.

On the other hand, Dabur India saw its EBIT drop by 2.0% in the last twelve months. That sort of decline, if sustained, will obviously make debt harder to handle. When analysing debt levels, the balance sheet is the obvious place to start. 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. 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 produced sturdy free cash flow equating to 66% 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 Dabur India's liabilities, but we can be reassured by the fact it has has net cash of ₹8.60b. So is Dabur India's debt a risk? It doesn't seem so to us. 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. We've identified 1 warning sign with Dabur India , and understanding them should be part of your investment process.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.