Does ZF Commercial Vehicle Control Systems India (NSE:ZFCVINDIA) Have A Healthy Balance Sheet?

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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that ZF Commercial Vehicle Control Systems India Limited (NSE:ZFCVINDIA) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for ZF Commercial Vehicle Control Systems India

What Is ZF Commercial Vehicle Control Systems India's Debt?

The image below, which you can click on for greater detail, shows that at September 2022 ZF Commercial Vehicle Control Systems India had debt of ₹368.1m, up from ₹82.9m in one year. However, its balance sheet shows it holds ₹11.6b in cash, so it actually has ₹11.2b net cash.

A Look At ZF Commercial Vehicle Control Systems India's Liabilities

According to the last reported balance sheet, ZF Commercial Vehicle Control Systems India had liabilities of ₹4.83b due within 12 months, and liabilities of ₹555.5m due beyond 12 months. Offsetting these obligations, it had cash of ₹11.6b as well as receivables valued at ₹6.94b due within 12 months. So it actually has ₹13.2b more liquid assets than total liabilities.

This short term liquidity is a sign that ZF Commercial Vehicle Control Systems India could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that ZF Commercial Vehicle Control Systems India has more cash than debt is arguably a good indication that it can manage its debt safely.

Even more impressive was the fact that ZF Commercial Vehicle Control Systems India grew its EBIT by 104% over twelve months. That boost will make it even easier to pay down debt going forward. When analysing debt levels, the balance sheet is the obvious place to start. But it is ZF Commercial Vehicle Control Systems India's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. ZF Commercial Vehicle Control Systems 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. In the last three years, ZF Commercial Vehicle Control Systems India's free cash flow amounted to 34% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While it is always sensible to investigate a company's debt, in this case ZF Commercial Vehicle Control Systems India has ₹11.2b in net cash and a decent-looking balance sheet. And we liked the look of last year's 104% year-on-year EBIT growth. So is ZF Commercial Vehicle Control Systems India's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 1 warning sign for ZF Commercial Vehicle Control Systems India that you should be aware of.

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.