Motherson Sumi Wiring India (NSE:MSUMI) Seems To Use Debt Rather Sparingly

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. We can see that Motherson Sumi Wiring India Limited (NSE:MSUMI) does use debt in its business. But the real question is whether this debt is making the company risky.

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Motherson Sumi Wiring India

What Is Motherson Sumi Wiring India's Debt?

The image below, which you can click on for greater detail, shows that Motherson Sumi Wiring India had debt of ₹2.59b at the end of March 2024, a reduction from ₹3.73b over a year. However, it does have ₹2.67b in cash offsetting this, leading to net cash of ₹79.0m.

A Look At Motherson Sumi Wiring India's Liabilities

We can see from the most recent balance sheet that Motherson Sumi Wiring India had liabilities of ₹12.3b falling due within a year, and liabilities of ₹2.35b due beyond that. Offsetting this, it had ₹2.67b in cash and ₹9.04b in receivables that were due within 12 months. So its liabilities total ₹2.91b more than the combination of its cash and short-term receivables.

This state of affairs indicates that Motherson Sumi Wiring India's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the ₹305.1b company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, Motherson Sumi Wiring India also has more cash than debt, so we're pretty confident it can manage its debt safely.

In addition to that, we're happy to report that Motherson Sumi Wiring India has boosted its EBIT by 35%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Motherson Sumi Wiring India can strengthen its balance sheet over time. 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. Motherson Sumi Wiring India 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, Motherson Sumi Wiring India recorded free cash flow worth 59% of its EBIT, which is around normal, given free cash flow excludes interest and tax. 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 Motherson Sumi Wiring India has ₹79.0m in net cash. And we liked the look of last year's 35% year-on-year EBIT growth. So is Motherson Sumi Wiring India'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. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 1 warning sign for Motherson Sumi Wiring India that you should be aware of before investing here.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.