Some say volatility, rather than debt, is the best way to think about risk as an investor, but 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 Eicher Motors Limited (NSE:EICHERMOT) has debt on its balance sheet. But the more important question is: what risk does this debt create?
Why is debt risky?
Debt helps a business until the business struggles to pay it back, either with new capital or with free cash flow. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are mercilessly liquidated by their bankers. Although not too common, we often see companies in debt permanently diluting their shareholders because lenders force them to raise capital at a ridiculous price. 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. The first thing to do when considering how much debt a business has is to look at its cash flow and debt together.
Check out our latest analysis for Eicher Motors
How much debt does Eicher Motors have?
You can click on the graph below for historical figures, but it shows that Eicher Motors had ₹1.22 billion in debt as of September 2021, up from ₹2.55 billion a year prior. But he also has ₹41.3 billion in cash to offset this, meaning he has a net cash of ₹40.1 billion.
A look at the responsibilities of Eicher Motors
We can see from the most recent balance sheet that Eicher Motors had liabilities of ₹23.3 billion due within a year, and liabilities of ₹5.44 billion due beyond. As compensation for these obligations, it had cash of ₹41.3 billion as well as receivables valued at ₹6.24 billion due within 12 months. It can therefore boast of having 18.8 billion more liquid assets than total Passives.
This short-term liquidity is a sign that Eicher Motors could probably service its debt easily, as its balance sheet is far from stretched. Simply put, the fact that Eicher Motors has more cash than debt is arguably a good indication that it can safely manage its debt.
On top of that, we are pleased to report that Eicher Motors increased its EBIT by 32%, reducing the specter of future debt repayments. When analyzing debt levels, the balance sheet is the obvious starting point. But future earnings, more than anything, will determine Eicher Motors’ ability to maintain a healthy balance sheet in the future. So if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.
Finally, a company can only repay its debts with cold hard cash, not with book profits. Eicher Motors may have net cash on the balance sheet, but it is always interesting to see how well the company converts its earnings before interest and taxes (EBIT) into free cash flow, as this will influence both its need and its capacity. . to manage debt. Over the past three years, Eicher Motors has recorded free cash flow of 56% of its EBIT, which is about normal, given that free cash flow excludes interest and taxes. This free cash flow puts the company in a good position to repay its debt, should it arise.
Abstract
While it is always a good idea to investigate a company’s debt, in this case Eicher Motors has ₹40.1 billion in net cash and a decent balance sheet. And we liked the look of EBIT growth of 32% YoY last year. So is Eicher Motors’ debt a risk? This does not seem to us to be the case. We’d be very happy to see if Eicher Motors insiders took any action. If you do too, click this link now to take a (free) look at our list of reported insider trades.
Of course, if you’re the type of investor who prefers to buy stocks without the burden of debt, then feel free to check out our exclusive list of cash-efficient growth stocks today.
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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.
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