The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Greaves Cotton Limited (NSE:GREAVESCOT) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Greaves Cotton

How Much Debt Does Greaves Cotton Carry?

As you can see below, at the end of March 2019, Greaves Cotton had ₹111.3m of debt, up from none a year ago. Click the image for more detail. However, its balance sheet shows it holds ₹2.32b in cash, so it actually has ₹2.21b net cash.

A Look At Greaves Cotton's Liabilities

The latest balance sheet data shows that Greaves Cotton had liabilities of ₹4.26b due within a year, and liabilities of ₹471.8m falling due after that. Offsetting these obligations, it had cash of ₹2.32b as well as receivables valued at ₹3.45b due within 12 months. So it actually has ₹1.04b more liquid assets than total liabilities.

This short term liquidity is a sign that Greaves Cotton could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Greaves Cotton has more cash than debt is arguably a good indication that it can manage its debt safely.

The good news is that Greaves Cotton has increased its EBIT by 4.4% over twelve months, which should ease any concerns about debt repayment. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Greaves Cotton'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.