We Think ZF Commercial Vehicle Control Systems India (NSE:ZFCVINDIA) Can Manage Its Debt With Ease

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, ZF Commercial Vehicle Control Systems India Limited (NSE:ZFCVINDIA) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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, 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out 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 March 2023 ZF Commercial Vehicle Control Systems India had debt of ₹653.5m, up from ₹38.9m in one year. However, it does have ₹12.7b in cash offsetting this, leading to net cash of ₹12.0b.

How Healthy 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 ₹5.36b due within 12 months and liabilities of ₹775.0m due beyond that. Offsetting these obligations, it had cash of ₹12.7b as well as receivables valued at ₹7.62b due within 12 months. So it actually has ₹14.1b 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. 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 82%, 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'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. 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 35% 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 ₹12.0b in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 82% over the last year. So we don't think ZF Commercial Vehicle Control Systems India's use of debt is risky. 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.

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.