3M India (NSE:3MINDIA) Has A Rock Solid Balance Sheet

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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 should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for 3M India

What Is 3M India's Debt?

You can click the graphic below for the historical numbers, but it shows that 3M India had ₹221.3m of debt in September 2022, down from ₹296.4m, one year before. However, its balance sheet shows it holds ₹14.2b in cash, so it actually has ₹14.0b net cash.

A Look At 3M India's Liabilities

The latest balance sheet data shows that 3M India had liabilities of ₹8.50b due within a year, and liabilities of ₹699.4m falling due after that. Offsetting these obligations, it had cash of ₹14.2b as well as receivables valued at ₹5.81b due within 12 months. So it actually has ₹10.8b 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!

In addition to that, we're happy to report that 3M India has boosted its EBIT by 84%, 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 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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 74% 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 ₹14.0b in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 84% over the last year. So we don't think 3M India's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in 3M 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.