We Think Dabur India (NSE:DABUR) Can Stay On Top Of Its Debt

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. We note that Dabur India Limited (NSE:DABUR) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. 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 ₹2.70b of debt at September 2020, down from ₹6.97b a year prior. But it also has ₹18.8b in cash to offset that, meaning it has ₹16.1b net cash.

A Look At Dabur India's Liabilities

According to the last reported balance sheet, Dabur India had liabilities of ₹28.9b due within 12 months, and liabilities of ₹2.24b due beyond 12 months. Offsetting this, it had ₹18.8b in cash and ₹7.79b in receivables that were due within 12 months. So its liabilities total ₹4.47b 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 ₹954.6b 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.

On the other hand, Dabur India saw its EBIT drop by 3.2% in the last twelve months. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. 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're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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 82% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Dabur India has ₹16.1b in net cash. And it impressed us with free cash flow of ₹17b, being 82% of its EBIT. So we don't think Dabur India's use of debt is risky. Of course, we wouldn't say no to the extra confidence that we'd gain if we knew that Dabur India insiders have been buying shares: if you're on the same wavelength, you can find out if insiders are buying by clicking this link.

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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