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.' 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 note that 3M India Limited (NSE:3MINDIA) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?
What Risk Does Debt Bring?
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. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.
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What Is 3M India's Debt?
You can click the graphic below for the historical numbers, but it shows that 3M India had ₹181.8m of debt in March 2024, down from ₹267.5m, one year before. However, it does have ₹13.6b in cash offsetting this, leading to net cash of ₹13.4b.
A Look At 3M India's Liabilities
We can see from the most recent balance sheet that 3M India had liabilities of ₹10.6b falling due within a year, and liabilities of ₹418.4m due beyond that. On the other hand, it had cash of ₹13.6b and ₹7.08b worth of receivables due within a year. So it can boast ₹9.62b more liquid assets than total liabilities.
This surplus suggests that 3M India has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, 3M India boasts net cash, so it's fair to say it does not have a heavy debt load!
And we also note warmly that 3M India grew its EBIT by 18% last year, making its debt load easier to handle. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if 3M India can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While 3M 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. Over the most recent three years, 3M India recorded free cash flow worth 76% 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 we empathize with investors who find debt concerning, you should keep in mind that 3M India has net cash of ₹13.4b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of ₹6.1b, being 76% of its EBIT. So is 3M India's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Be aware that 3M India is showing 1 warning sign in our investment analysis , you should know about...
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.
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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.
About NSEI:3MINDIA
3M India
Manufactures and trades in various products for the automotive, commercial solutions, consumer markets, design and construction, electronics, energy, health care, manufacturing, safety, and transportation industries in India and internationally.
Outstanding track record with flawless balance sheet.