Does 3M India (NSE:3MINDIA) Have A Healthy Balance Sheet?

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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, 3M India Limited (NSE:3MINDIA) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for 3M India

What Is 3M India's Net Debt?

The image below, which you can click on for greater detail, shows that at March 2022 3M India had debt of ₹245.7m, up from ₹231.3m in one year. But it also has ₹13.3b in cash to offset that, meaning it has ₹13.0b net cash.

How Healthy Is 3M India's Balance Sheet?

According to the last reported balance sheet, 3M India had liabilities of ₹7.60b due within 12 months, and liabilities of ₹619.1m due beyond 12 months. On the other hand, it had cash of ₹13.3b and ₹5.53b worth of receivables due within a year. So it actually has ₹10.6b 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. 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 41% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if 3M 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.

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 last three years, 3M India recorded free cash flow worth a fulsome 82% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that 3M India has net cash of ₹13.0b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of ₹2.6b, being 82% of its EBIT. 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.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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.