We Think ZF Commercial Vehicle Control Systems India (NSE:ZFCVINDIA) Can Stay On Top Of Its Debt

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.' 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 can see that ZF Commercial Vehicle Control Systems India Limited (NSE:ZFCVINDIA) does use debt in its business. But should shareholders be worried about its use of debt?

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Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. 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. When we think about a company's use of debt, we first look at cash and debt together.

How Much Debt Does ZF Commercial Vehicle Control Systems India Carry?

As you can see below, ZF Commercial Vehicle Control Systems India had ₹630.2m of debt, at September 2024, which is about the same as the year before. You can click the chart for greater detail. However, its balance sheet shows it holds ₹14.2b in cash, so it actually has ₹13.5b net cash.

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 ₹5.53b due within 12 months and liabilities of ₹782.1m due beyond that. On the other hand, it had cash of ₹14.2b and ₹10.1b worth of receivables due within a year. So it actually has ₹17.9b 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!

View our latest analysis for ZF Commercial Vehicle Control Systems India

Fortunately, ZF Commercial Vehicle Control Systems India grew its EBIT by 5.4% in the last year, making that debt load look even more manageable. When analysing debt levels, the balance sheet is the obvious place to start. 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. 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. Over the last three years, ZF Commercial Vehicle Control Systems India reported free cash flow worth 19% of its EBIT, which is really quite low. That limp level of cash conversion undermines its ability to manage and pay 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 ₹13.5b in net cash and a decent-looking balance sheet. And it also grew its EBIT by 5.4% over the last year. 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, 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.