Eicher Motors (NSE:EICHERMOT) Seems To Use Debt Quite Sensibly

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Eicher Motors Limited (NSE:EICHERMOT) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

Trump has pledged to "unleash" American oil and gas and these 15 US stocks have developments that are poised to benefit.

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is Eicher Motors's Net Debt?

The image below, which you can click on for greater detail, shows that at March 2025 Eicher Motors had debt of ₹4.58b, up from ₹4.19b in one year. But it also has ₹37.5b in cash to offset that, meaning it has ₹32.9b net cash.

How Healthy Is Eicher Motors' Balance Sheet?

We can see from the most recent balance sheet that Eicher Motors had liabilities of ₹42.7b falling due within a year, and liabilities of ₹16.1b due beyond that. On the other hand, it had cash of ₹37.5b and ₹12.0b worth of receivables due within a year. So its liabilities total ₹9.29b more than the combination of its cash and short-term receivables.

Having regard to Eicher Motors' size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the ₹1.58t company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, Eicher Motors boasts net cash, so it's fair to say it does not have a heavy debt load!

Check out our latest analysis for Eicher Motors

But the bad news is that Eicher Motors has seen its EBIT plunge 17% in the last twelve months. If that rate of decline in earnings continues, the company could find itself in a tight spot. 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 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. While Eicher Motors has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, Eicher Motors produced sturdy free cash flow equating to 69% of its EBIT, about what we'd expect. 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 look at a company's total liabilities, it is very reassuring that Eicher Motors has ₹32.9b in net cash. And it impressed us with free cash flow of ₹29b, being 69% of its EBIT. So we are not troubled with Eicher Motors's debt use. 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.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.