Is 3M India (NSE:3MINDIA) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies 3M India Limited (NSE:3MINDIA) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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?

The image below, which you can click on for greater detail, shows that at September 2024 3M India had debt of ₹1.03b, up from ₹238.1m in one year. But it also has ₹6.27b in cash to offset that, meaning it has ₹5.24b net cash.

How Strong Is 3M India's Balance Sheet?

The latest balance sheet data shows that 3M India had liabilities of ₹9.57b due within a year, and liabilities of ₹1.30b falling due after that. Offsetting these obligations, it had cash of ₹6.27b as well as receivables valued at ₹7.48b due within 12 months. So it can boast ₹2.89b more liquid assets than total liabilities.

Having regard to 3M India's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the ₹308.1b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, 3M India boasts net cash, so it's fair to say it does not have a heavy debt load!

3M India's EBIT was pretty flat over the last year, but that shouldn't be an issue given the it doesn't have a lot of debt. When analysing debt levels, the balance sheet is the obvious place to start. 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 65% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While it is always sensible to investigate a company's debt, in this case 3M India has ₹5.24b in net cash and a decent-looking balance sheet. So we don't think 3M India's use of debt is risky. 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. We've identified 1 warning sign with 3M India , and understanding them should be part of your investment process.

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.