Godrej Consumer Products (NSE:GODREJCP) Seems To Use Debt Quite Sensibly

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Godrej Consumer Products Limited (NSE:GODREJCP) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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 Godrej Consumer Products

What Is Godrej Consumer Products's Net Debt?

As you can see below, Godrej Consumer Products had ₹11.6b of debt at September 2022, down from ₹22.2b a year prior. However, its balance sheet shows it holds ₹16.7b in cash, so it actually has ₹5.07b net cash.

How Strong Is Godrej Consumer Products' Balance Sheet?

According to the last reported balance sheet, Godrej Consumer Products had liabilities of ₹32.6b due within 12 months, and liabilities of ₹5.92b due beyond 12 months. Offsetting these obligations, it had cash of ₹16.7b as well as receivables valued at ₹10.9b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹10.8b.

Having regard to Godrej Consumer Products' size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the ₹937.1b company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Godrej Consumer Products boasts net cash, so it's fair to say it does not have a heavy debt load!

But the other side of the story is that Godrej Consumer Products saw its EBIT decline by 8.4% over the last year. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Godrej Consumer Products 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Godrej Consumer Products 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 most recent three years, Godrej Consumer Products recorded free cash flow worth 68% of its EBIT, which is around normal, given free cash flow excludes interest and tax. 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 Godrej Consumer Products's liabilities, but we can be reassured by the fact it has has net cash of ₹5.07b. And it impressed us with free cash flow of ₹15b, being 68% of its EBIT. So we are not troubled with Godrej Consumer Products's debt use. Of course, we wouldn't say no to the extra confidence that we'd gain if we knew that Godrej Consumer Products insiders have been buying shares: if you're on the same wavelength, you can find out if insiders are buying by clicking this link.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.