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

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 can see that Eicher Motors Limited (NSE:EICHERMOT) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, 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

How Much Debt Does Eicher Motors Carry?

As you can see below, Eicher Motors had ₹2.64b of debt, at September 2024, which is about the same as the year before. You can click the chart for greater detail. However, it does have ₹28.8b in cash offsetting this, leading to net cash of ₹26.2b.

How Healthy Is Eicher Motors' Balance Sheet?

The latest balance sheet data shows that Eicher Motors had liabilities of ₹38.1b due within a year, and liabilities of ₹15.9b falling due after that. Offsetting these obligations, it had cash of ₹28.8b as well as receivables valued at ₹6.55b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹18.6b.

Having regard to Eicher Motors' size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the ₹1.32t 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.

In addition to that, we're happy to report that Eicher Motors has boosted its EBIT by 45%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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 69% 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 look at a company's total liabilities, it is very reassuring that Eicher Motors has ₹26.2b in net cash. And it impressed us with its EBIT growth of 45% over the last year. So we don't think Eicher Motors's use of debt is risky. 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.

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.