Abbott India (NSE:ABBOTINDIA) Has A Rock Solid Balance Sheet

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Abbott India Limited (NSE:ABBOTINDIA) does carry debt. But the more important question is: how much risk is that debt creating?

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Why Does Debt Bring Risk?

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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

How Much Debt Does Abbott India Carry?

As you can see below, Abbott India had ₹605.0m of debt at September 2024, down from ₹915.4m a year prior. But on the other hand it also has ₹11.1b in cash, leading to a ₹10.5b net cash position.

A Look At Abbott India's Liabilities

Zooming in on the latest balance sheet data, we can see that Abbott India had liabilities of ₹13.8b due within 12 months and liabilities of ₹1.59b due beyond that. On the other hand, it had cash of ₹11.1b and ₹3.95b worth of receivables due within a year. So it has liabilities totalling ₹414.4m more than its cash and near-term receivables, combined.

Having regard to Abbott India's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the ₹641.3b company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, Abbott India boasts net cash, so it's fair to say it does not have a heavy debt load!

View our latest analysis for Abbott India

Also good is that Abbott India grew its EBIT at 14% over the last year, further increasing its ability to manage debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Abbott India'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. While Abbott 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. Over the most recent three years, Abbott India recorded free cash flow worth 74% 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 Abbott India's liabilities, but we can be reassured by the fact it has has net cash of ₹10.5b. The cherry on top was that in converted 74% of that EBIT to free cash flow, bringing in ₹9.7b. So is Abbott India'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 instance, we've identified 1 warning sign for Abbott India that you should be aware of.

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.