Eicher Motors (NSE:EICHERMOT) Seems To Use Debt Rather Sparingly

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Eicher Motors

What Is Eicher Motors's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2022 Eicher Motors had ₹1.68b of debt, an increase on ₹1.22b, over one year. However, its balance sheet shows it holds ₹26.9b in cash, so it actually has ₹25.2b net cash.

How Healthy Is Eicher Motors' Balance Sheet?

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. Offsetting this, it had ₹26.9b in cash and ₹8.64b in receivables that were due within 12 months. So its liabilities total ₹4.06b more than the combination of its cash and short-term receivables.

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 ₹854.1b 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 74% over the last twelve months, and that growth will make it easier to handle its debt. 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.

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 74% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

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 ₹25.2b. And we liked the look of last year's 74% year-on-year EBIT growth. So we don't think Eicher Motors's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in Eicher Motors, you may well want to click here to check an interactive graph of its earnings per share history.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.