Eicher Motors (NSE:EICHERMOT) Could Easily Take On More Debt

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 note that Eicher Motors Limited (NSE:EICHERMOT) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. 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 Eicher Motors

How Much Debt Does Eicher Motors Carry?

You can click the graphic below for the historical numbers, but it shows that Eicher Motors had ₹1.22b of debt in September 2021, down from ₹2.55b, one year before. But it also has ₹41.3b in cash to offset that, meaning it has ₹40.1b net cash.

A Look At Eicher Motors' Liabilities

We can see from the most recent balance sheet that Eicher Motors had liabilities of ₹23.3b falling due within a year, and liabilities of ₹5.44b due beyond that. Offsetting these obligations, it had cash of ₹41.3b as well as receivables valued at ₹6.24b due within 12 months. So it can boast ₹18.8b more liquid assets than total liabilities.

This short term liquidity is a sign that Eicher Motors could probably pay off its debt with ease, 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 manage its debt safely.

In addition to that, we're happy to report that Eicher Motors has boosted its EBIT by 32%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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 56% 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

While it is always sensible to investigate a company's debt, in this case Eicher Motors has ₹40.1b in net cash and a decent-looking balance sheet. And we liked the look of last year's 32% year-on-year EBIT growth. So is Eicher Motors's debt a risk? It doesn't seem so to us. We'd be very excited to see if Eicher Motors insiders have been snapping up shares. If you are too, then click on this link right now to take a (free) peek at our list of reported insider transactions.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.