Eicher Motors (NSE:EICHERMOT) Has A Rock Solid Balance Sheet

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Eicher Motors Limited (NSE:EICHERMOT) does carry debt. 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. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

View our latest analysis for Eicher Motors

What Is Eicher Motors's Debt?

The image below, which you can click on for greater detail, shows that Eicher Motors had debt of ₹2.19b at the end of March 2021, a reduction from ₹2.49b over a year. However, its balance sheet shows it holds ₹68.9b in cash, so it actually has ₹66.8b net cash.

How Strong Is Eicher Motors' Balance Sheet?

The latest balance sheet data shows that Eicher Motors had liabilities of ₹26.3b due within a year, and liabilities of ₹4.92b falling due after that. On the other hand, it had cash of ₹68.9b and ₹8.32b worth of receivables due within a year. So it can boast ₹46.1b more liquid assets than total liabilities.

This surplus suggests that Eicher Motors has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Eicher Motors boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Eicher Motors grew its EBIT by 40% 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 ultimately the future profitability of the business will decide if Eicher Motors can strengthen its balance sheet over time. 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. During the last three years, Eicher Motors produced sturdy free cash flow equating to 57% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing up

While it is always sensible to investigate a company's debt, in this case Eicher Motors has ₹66.8b in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 40% over the last year. So we don't think Eicher Motors's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 1 warning sign for Eicher Motors you should be aware of.

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.
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