3M India (NSE:3MINDIA) Could Easily Take On More Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, 3M India Limited (NSE:3MINDIA) does carry debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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 think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for 3M India

How Much Debt Does 3M India Carry?

You can click the graphic below for the historical numbers, but it shows that 3M India had ₹296.4m of debt in September 2021, down from ₹311.4m, one year before. But it also has ₹11.9b in cash to offset that, meaning it has ₹11.6b net cash.

A Look At 3M India's Liabilities

The latest balance sheet data shows that 3M India had liabilities of ₹7.60b due within a year, and liabilities of ₹611.2m falling due after that. Offsetting these obligations, it had cash of ₹11.9b as well as receivables valued at ₹5.10b due within 12 months. So it actually has ₹8.76b more liquid assets than total liabilities.

This short term liquidity is a sign that 3M India could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that 3M India has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, 3M India grew its EBIT by 54% over the last twelve months, and that growth will make it easier to handle its debt. 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 3M 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 3M 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 most recent three years, 3M India recorded free cash flow worth 78% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

While it is always sensible to investigate a company's debt, in this case 3M India has ₹11.6b in net cash and a decent-looking balance sheet. And we liked the look of last year's 54% year-on-year EBIT growth. So is 3M 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. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 1 warning sign we've spotted with 3M India .

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.