Is ZF Commercial Vehicle Control Systems India (NSE:ZFCVINDIA) A Risky Investment?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 note that ZF Commercial Vehicle Control Systems India Limited (NSE:ZFCVINDIA) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

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. 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?

As you can see below, at the end of September 2023, ZF Commercial Vehicle Control Systems India had ₹638.2m of debt, up from ₹368.1m a year ago. Click the image for more detail. However, its balance sheet shows it holds ₹13.6b in cash, so it actually has ₹13.0b net cash.

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

According to the last reported balance sheet, ZF Commercial Vehicle Control Systems India had liabilities of ₹5.51b due within 12 months, and liabilities of ₹793.5m due beyond 12 months. On the other hand, it had cash of ₹13.6b and ₹8.21b worth of receivables due within a year. So it can boast ₹15.5b 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!

In addition to that, we're happy to report that ZF Commercial Vehicle Control Systems India has boosted its EBIT by 42%, thus reducing the spectre of future debt repayments. 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 ZF Commercial Vehicle Control Systems India's ability to maintain a healthy balance sheet going forward. 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. 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. Looking at the most recent three years, ZF Commercial Vehicle Control Systems India recorded free cash flow of 34% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case ZF Commercial Vehicle Control Systems India has ₹13.0b in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 42% over the last year. So we don't think ZF Commercial Vehicle Control Systems India'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 ZF Commercial Vehicle Control Systems India's earnings per share history for free.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.