Howard Marks said it well when he said that, rather than worrying about stock price volatility, “the possibility of permanent loss is the risk I worry about…and that every practical investor that I know is worried”. When we think of a company’s risk, we always like to look at its use of debt, because over-indebtedness can lead to ruin. We note that Nestle India Limited (NSE:NESTLEIND) has debt on its balance sheet. But the more important question is: what risk does this debt create?
What risk does debt carry?
Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, it exists at their mercy. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. However, a more common (but still costly) event is when a company has to issue stock at bargain prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, the advantage of debt is that it often represents cheap capital, especially when it replaces dilution in a business with the ability to reinvest at high rates of return. When we think about a company’s use of debt, we first look at cash and debt together.
Check out our latest analysis for Nestlé India
What is Nestlé India’s net debt?
As you can see below, Nestlé India had ₹340.6 million in debt, as of December 2021, which is about the same as the previous year. You can click on the graph for more details. However, his balance sheet shows that he holds ₹7.82 billion in cash, so he actually has ₹7.48 billion in net cash.
How strong is Nestlé India’s balance sheet?
Zooming in on the latest balance sheet data, we can see that Nestlé India had liabilities of ₹26.0 billion due within 12 months and liabilities of ₹35.2 billion due beyond. On the other hand, it had a cash position of ₹7.82 billion and ₹2.52 billion in receivables due within a year. Thus, its liabilities outweigh the sum of its cash and (short-term) receivables by ₹50.9 billion.
Given that publicly traded Nestlé India shares are worth a very impressive total of ₹1.66t, it seems unlikely that this level of liability is a major threat. That said, it is clear that we must continue to monitor its record, lest it deteriorate. Although it has liabilities to note, Nestlé India also has more cash than debt, so we are quite confident that it can manage its debt safely.
And we also warmly note that Nestlé India increased its EBIT by 12% last year, which makes it easier to manage its debt. There is no doubt that we learn the most about debt from the balance sheet. But you can’t look at debt in total isolation; as Nestlé India will need revenue to repay this debt. So, if you want to know more about its earnings, it may be worth checking out this graph of its long-term trend.
Finally, a company can only repay its debts with cold hard cash, not with book profits. Nestlé India may have net cash on the balance sheet, but it is always interesting to see how well the business converts its earnings before interest and tax (EBIT) into free cash flow, as this will influence both its needs and its capacity. . to manage debt. Over the past three years, Nestlé India has produced strong free cash flow equivalent to 69% of its EBIT, which is what we expected. This free cash flow puts the company in a good position to repay its debt, should it arise.
We could understand if investors are worried about Nestlé India’s liabilities, but we can take comfort in the fact that it has a net cash position of ₹7.48 billion. The icing on the cake was that he converted 69% of that EBIT into free cash flow, bringing in ₹15 billion. We therefore do not believe that Nestlé India’s use of debt is risky. There is no doubt that we learn the most about debt from the balance sheet. However, not all investment risks reside on the balance sheet, far from it. To this end, you should be aware of the 1 warning sign we spotted with Nestlé India.
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.