These 4 Measures Indicate That 3M India (NSE:3MINDIA) Is Using Debt Safely

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 can see that 3M India Limited (NSE:3MINDIA) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

View 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 as of March 2023 3M India had ₹267.5m of debt, an increase on ₹245.7m, over one year. However, its balance sheet shows it holds ₹7.98b in cash, so it actually has ₹7.71b net cash.

A Look At 3M India's Liabilities

According to the last reported balance sheet, 3M India had liabilities of ₹9.80b due within 12 months, and liabilities of ₹566.1m due beyond 12 months. On the other hand, it had cash of ₹7.98b and ₹6.41b worth of receivables due within a year. So it actually has ₹4.02b more liquid assets than total liabilities.

This state of affairs indicates that 3M India's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the ₹365.3b 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!

In addition to that, we're happy to report that 3M India has boosted its EBIT by 51%, thus reducing the spectre of future debt repayments. 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 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. During the last three years, 3M India produced sturdy free cash flow equating to 66% of its EBIT, about what we'd expect. 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 ₹7.71b in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 51% 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.

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.