Is Godrej Consumer Products (NSE:GODREJCP) A Risky Investment?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. Importantly, Godrej Consumer Products Limited (NSE:GODREJCP) does carry debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Godrej Consumer Products

How Much Debt Does Godrej Consumer Products Carry?

You can click the graphic below for the historical numbers, but it shows that Godrej Consumer Products had ₹7.60b of debt in March 2021, down from ₹36.1b, one year before. But on the other hand it also has ₹14.0b in cash, leading to a ₹6.41b net cash position.

How Strong Is Godrej Consumer Products' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Godrej Consumer Products had liabilities of ₹41.4b due within 12 months and liabilities of ₹7.08b due beyond that. Offsetting this, it had ₹14.0b in cash and ₹10.1b in receivables that were due within 12 months. So it has liabilities totalling ₹24.3b more than its cash and near-term receivables, combined.

Since publicly traded Godrej Consumer Products shares are worth a very impressive total of ₹889.8b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Godrej Consumer Products also has more cash than debt, so we're pretty confident it can manage its debt safely.

And we also note warmly that Godrej Consumer Products grew its EBIT by 15% last year, making its debt load easier to handle. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Godrej Consumer Products can strengthen its balance sheet over time. 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. 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 78% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

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 ₹6.41b. The cherry on top was that in converted 78% of that EBIT to free cash flow, bringing in ₹19b. So is Godrej Consumer Products's debt a risk? It doesn't seem so to us. 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, we've discovered 1 warning sign for Godrej Consumer Products that you should be aware of before investing here.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

If you decide to trade Godrej Consumer Products, use the lowest-cost* platform that is rated #1 Overall by Barron’s, Interactive Brokers. Trade stocks, options, futures, forex, bonds and funds on 135 markets, all from a single integrated account. Promoted

This article by Simply Wall St is general in nature. 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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.