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

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. As with many other companies Godrej Consumer Products Limited (NSE:GODREJCP) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Godrej Consumer Products

How Much Debt Does Godrej Consumer Products Carry?

As you can see below, Godrej Consumer Products had ₹16.1b of debt at March 2022, down from ₹18.0b a year prior. But on the other hand it also has ₹19.5b in cash, leading to a ₹3.44b net cash position.

A Look At Godrej Consumer Products' Liabilities

According to the last reported balance sheet, Godrej Consumer Products had liabilities of ₹39.7b due within 12 months, and liabilities of ₹6.07b due beyond 12 months. Offsetting these obligations, it had cash of ₹19.5b as well as receivables valued at ₹11.2b due within 12 months. So its liabilities total ₹15.1b more than the combination of its cash and short-term receivables.

Having regard to Godrej Consumer Products' size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the ₹814.5b company is struggling for cash, we still think it's worth monitoring its balance sheet. 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.

Godrej Consumer Products's EBIT was pretty flat over the last year, but that shouldn't be an issue given the it doesn't have a lot of debt. There's no doubt that we learn most about debt from the balance sheet. 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, 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 69% 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

While it is always sensible to look at a company's total liabilities, it is very reassuring that Godrej Consumer Products has ₹3.44b in net cash. And it impressed us with free cash flow of ₹12b, being 69% of its EBIT. So we don't think Godrej Consumer Products'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 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.