Is Eicher Motors (NSE:EICHERMOT) Using Too Much Debt?

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 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. Importantly, Eicher Motors Limited (NSE:EICHERMOT) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, plenty of companies use debt to fund growth, without any negative consequences. 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

What Is Eicher Motors's Net Debt?

The image below, which you can click on for greater detail, shows that Eicher Motors had debt of ₹588.4m at the end of March 2022, a reduction from ₹1.57b over a year. But it also has ₹31.5b in cash to offset that, meaning it has ₹30.9b net cash.

How Healthy Is Eicher Motors' Balance Sheet?

We can see from the most recent balance sheet that Eicher Motors had liabilities of ₹29.8b falling due within a year, and liabilities of ₹6.10b due beyond that. Offsetting this, it had ₹31.5b in cash and ₹9.79b in receivables that were due within 12 months. So it actually has ₹5.33b more liquid assets than total liabilities.

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 while it's hard to imagine that the ₹801.1b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Eicher Motors boasts net cash, so it's fair to say it does not have a heavy debt load!

Also good is that Eicher Motors grew its EBIT at 18% over the last year, further increasing its ability to manage debt. 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. 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 69% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Eicher Motors has net cash of ₹30.9b, as well as more liquid assets than liabilities. The cherry on top was that in converted 69% of that EBIT to free cash flow, bringing in ₹8.9b. 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, 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.

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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.