Is Emami (NSE:EMAMILTD) Using Too Much Debt?

Warren Buffett famously said, '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. As with many other companies Emami Limited (NSE:EMAMILTD) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

See our latest analysis for Emami

How Much Debt Does Emami Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2021 Emami had ₹1.28b of debt, an increase on none, over one year. But on the other hand it also has ₹7.69b in cash, leading to a ₹6.41b net cash position.

How Strong Is Emami's Balance Sheet?

According to the last reported balance sheet, Emami had liabilities of ₹7.20b due within 12 months, and liabilities of ₹562.7m due beyond 12 months. Offsetting these obligations, it had cash of ₹7.69b as well as receivables valued at ₹2.97b due within 12 months. So it can boast ₹2.89b more liquid assets than total liabilities.

Having regard to Emami's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the ₹204.0b company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that Emami has more cash than debt is arguably a good indication that it can manage its debt safely.

In addition to that, we're happy to report that Emami has boosted its EBIT by 36%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Emami'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. Emami 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. Over the last three years, Emami actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Emami has net cash of ₹6.41b, as well as more liquid assets than liabilities. The cherry on top was that in converted 126% of that EBIT to free cash flow, bringing in ₹7.3b. So we don't think Emami's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 1 warning sign we've spotted with Emami .

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.