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

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Eicher Motors Limited (NSE:EICHERMOT) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Eicher Motors

How Much Debt Does Eicher Motors Carry?

As you can see below, at the end of September 2023, Eicher Motors had ₹2.69b of debt, up from ₹1.23b a year ago. Click the image for more detail. However, its balance sheet shows it holds ₹17.0b in cash, so it actually has ₹14.4b net cash.

How Strong Is Eicher Motors' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Eicher Motors had liabilities of ₹38.6b due within 12 months and liabilities of ₹12.7b due beyond that. On the other hand, it had cash of ₹17.0b and ₹7.56b worth of receivables due within a year. So its liabilities total ₹26.7b more than the combination of its cash and short-term receivables.

Since publicly traded Eicher Motors shares are worth a very impressive total of ₹1.10t, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. 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 35% 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 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'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 77% 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 ₹14.4b. And it impressed us with its EBIT growth of 35% over the last year. So is Eicher Motors's debt a risk? It doesn't seem so to us. We'd be very excited to see if Eicher Motors insiders have been snapping up shares. If you are too, then click on this link right now to take a (free) peek at our list of reported insider transactions.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.