Warren Buffett said: “Volatility is far from synonymous with risk. It’s natural to consider a company’s balance sheet when looking at its riskiness, as debt is often involved when a company fails. We note that Tata Consumer Products Limited (NSE:TATACONSUM) has debt on its balance sheet. But should shareholders worry about its use of debt?
When is debt dangerous?
Generally speaking, debt only becomes a real problem when a company cannot easily repay it, either by raising capital or with its own cash flow. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. However, a more frequent (but still costly) event is when a company has to issue shares at bargain prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, especially capital-intensive businesses. The first step when considering a company’s debt levels is to consider its cash and debt together.
Check out our latest analysis for Tata consumer products
What is Tata Consumer Products’ net debt?
You can click on the graph below for historical figures, but it shows Tata Consumer Products had ₹11.7 billion in debt as of September 2021, up from ₹14.6 billion a year prior. But on the other hand, it also has ₹27.4 billion in cash, resulting in a net cash position of ₹15.7 billion.
How healthy is Tata Consumer Products’ balance sheet?
According to the latest published balance sheet, Tata Consumer Products had liabilities of ₹25.1 billion due within 12 months and liabilities of ₹15.9 billion due beyond 12 months. In return, he had ₹27.4 billion in cash and ₹8.77 billion in receivables due within 12 months. It therefore has liabilities totaling ₹4.79 billion more than its cash and short-term receivables, combined.
This situation indicates that Tata Consumer Products’ balance sheet looks quite strong, as its total liabilities roughly equal its cash. So while it’s hard to imagine the ₹684.5bn company struggling to raise cash, we still think it’s worth keeping an eye on its balance sheet. While it has liabilities to note, Tata Consumer Products also has more cash than debt, so we’re pretty confident it can manage its debt safely.
Although Tata Consumer Products doesn’t seem to have gained much on the EBIT line, at least earnings are holding steady for now. There is no doubt that we learn the most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Tata Consumer Products’ ability to maintain a healthy balance sheet in the future. So if you are focused on the future, you can check out this free report showing analyst earnings forecast.
Finally, a business needs free cash flow to pay off its debts; book profits are not enough. Although Tata Consumer Products has net cash on its balance sheet, it’s always worth looking at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how fast it’s growing. builds (or erodes) cash balance. Over the past three years, Tata Consumer Products has recorded free cash flow of 97% of its EBIT, which is higher than what we would normally expect. This positions him well to pay off debt if desired.
While it’s always a good idea to look at a company’s total liabilities, it’s very reassuring that Tata Consumer Products has ₹15.7 billion in net cash. The icing on the cake was that he converted 97% of that EBIT into free cash flow, bringing in ₹14 billion. So is Tata Consumer Products’ debt a risk? This does not seem to us to be the case. Over time, share prices tend to follow earnings per share, so if you are interested in Tata Consumer Products, you may want to click here for an interactive chart of its earnings per share history.
In the end, sometimes it’s easier to focus on companies that don’t even need to take on debt. Readers can access a list of growth stocks with no net debt 100% freeat present.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.