Does Eicher Motors (NSE:EICHERMOT) Have A Healthy Balance Sheet?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Eicher Motors Limited (NSE:EICHERMOT) makes use of debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Eicher Motors

What Is Eicher Motors's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2022 Eicher Motors had debt of ₹1.23b, up from ₹695.9m in one year. However, its balance sheet shows it holds ₹26.9b in cash, so it actually has ₹25.6b net cash.

A Look At Eicher Motors' Liabilities

We can see from the most recent balance sheet that Eicher Motors had liabilities of ₹31.6b falling due within a year, and liabilities of ₹7.95b due beyond that. On the other hand, it had cash of ₹26.9b and ₹8.64b worth of receivables due within a year. So it has liabilities totalling ₹4.06b more than its cash and near-term receivables, combined.

This state of affairs indicates that Eicher Motors' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the ₹940.1b company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, Eicher Motors also has more cash than debt, so we're pretty confident it can manage its debt safely.

On top of that, Eicher Motors grew its EBIT by 47% over the last twelve months, and that growth will make it easier to handle its debt. 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 Eicher Motors'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Eicher Motors may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the most recent three years, Eicher Motors recorded free cash flow worth 71% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

We could understand if investors are concerned about Eicher Motors's liabilities, but we can be reassured by the fact it has has net cash of ₹25.6b. And we liked the look of last year's 47% year-on-year EBIT growth. So is Eicher Motors's debt a risk? It doesn't seem so to us. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Eicher Motors's earnings per share history for free.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.