Here's Why ZF Commercial Vehicle Control Systems India (NSE:ZFCVINDIA) Can Manage Its Debt Responsibly

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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 note that ZF Commercial Vehicle Control Systems India Limited (NSE:ZFCVINDIA) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for ZF Commercial Vehicle Control Systems India

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

You can click the graphic below for the historical numbers, but it shows that as of March 2024 ZF Commercial Vehicle Control Systems India had ₹684.4m of debt, an increase on ₹653.5m, over one year. But it also has ₹13.2b in cash to offset that, meaning it has ₹12.5b net cash.

How Strong Is ZF Commercial Vehicle Control Systems India's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that ZF Commercial Vehicle Control Systems India had liabilities of ₹5.10b due within 12 months and liabilities of ₹813.1m due beyond that. Offsetting this, it had ₹13.2b in cash and ₹9.39b in receivables that were due within 12 months. So it actually has ₹16.7b more liquid assets than total liabilities.

This surplus suggests that ZF Commercial Vehicle Control Systems India has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, ZF Commercial Vehicle Control Systems India boasts net cash, so it's fair to say it does not have a heavy debt load!

And we also note warmly that ZF Commercial Vehicle Control Systems India grew its EBIT by 12% last year, making its debt load easier to handle. 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 ZF Commercial Vehicle Control Systems 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While ZF Commercial Vehicle Control Systems India 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. Looking at the most recent three years, ZF Commercial Vehicle Control Systems India recorded free cash flow of 22% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that ZF Commercial Vehicle Control Systems India has net cash of ₹12.5b, as well as more liquid assets than liabilities. On top of that, it increased its EBIT by 12% in the last twelve months. So we are not troubled with ZF Commercial Vehicle Control Systems India's debt use. Over time, share prices tend to follow earnings per share, so if you're interested in ZF Commercial Vehicle Control Systems India, you may well want to click here to check an interactive graph of its earnings per share history.

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.