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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. We can see that Crompton Greaves Consumer Electricals Limited (NSE:CROMPTON) does use debt in its business. But the more important question is: how much risk is that debt creating?
Why Does Debt Bring Risk?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.
Check out our latest analysis for Crompton Greaves Consumer Electricals
How Much Debt Does Crompton Greaves Consumer Electricals Carry?
The chart below, which you can click on for greater detail, shows that Crompton Greaves Consumer Electricals had ₹6.49b in debt in March 2019; about the same as the year before. However, its balance sheet shows it holds ₹6.83b in cash, so it actually has ₹339.3m net cash.
A Look At Crompton Greaves Consumer Electricals's Liabilities
The latest balance sheet data shows that Crompton Greaves Consumer Electricals had liabilities of ₹12.1b due within a year, and liabilities of ₹3.67b falling due after that. On the other hand, it had cash of ₹6.83b and ₹6.22b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹2.67b.
This state of affairs indicates that Crompton Greaves Consumer Electricals's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the ₹144.5b company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, Crompton Greaves Consumer Electricals boasts net cash, so it's fair to say it does not have a heavy debt load!
The good news is that Crompton Greaves Consumer Electricals has increased its EBIT by 6.7% over twelve months, which should ease any concerns about debt repayment. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Crompton Greaves Consumer Electricals's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.