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 real question is whether this debt is making the company risky.

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. 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. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Eicher Motors

What Is Eicher Motors's Debt?

The chart below, which you can click on for greater detail, shows that Eicher Motors had ₹4.04b in debt in September 2024; about the same as the year before. But on the other hand it also has ₹28.8b in cash, leading to a ₹24.8b net cash position.

How Strong Is Eicher Motors' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Eicher Motors had liabilities of ₹38.1b due within 12 months and liabilities of ₹15.9b due beyond that. Offsetting these obligations, it had cash of ₹28.8b as well as receivables valued at ₹6.55b due within 12 months. So its liabilities total ₹18.6b 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 while it's hard to imagine that the ₹1.37t 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!

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. 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'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 66% 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 ₹24.8b in net cash. And it impressed us with its EBIT growth of 35% over the last year. So we don't think Eicher Motors's use of debt is risky. 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.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.