These 4 Measures Indicate That Eicher Motors (NSE:EICHERMOT) Is Using Debt Safely

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. Importantly, Eicher Motors Limited (NSE:EICHERMOT) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

See 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 at March 2023 Eicher Motors had debt of ₹1.96b, up from ₹588.4m in one year. But on the other hand it also has ₹10.8b in cash, leading to a ₹8.81b net cash position.

How Strong Is Eicher Motors' Balance Sheet?

According to the last reported balance sheet, Eicher Motors had liabilities of ₹32.3b due within 12 months, and liabilities of ₹9.73b due beyond 12 months. On the other hand, it had cash of ₹10.8b and ₹9.58b worth of receivables due within a year. So it has liabilities totalling ₹21.7b more than its cash and near-term receivables, combined.

Given Eicher Motors has a humongous market capitalization of ₹980.3b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Eicher Motors boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Eicher Motors has boosted its EBIT by 61%, thus reducing the spectre of future debt repayments. 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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 75% 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

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 ₹8.81b. And we liked the look of last year's 61% year-on-year EBIT growth. So is Eicher Motors's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 1 warning sign for Eicher Motors you should be aware of.

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.