Cummins India (NSE:CUMMINSIND) Has A Rock Solid Balance Sheet

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. We note that Cummins India Limited (NSE:CUMMINSIND) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. 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 Cummins India

How Much Debt Does Cummins India Carry?

The image below, which you can click on for greater detail, shows that Cummins India had debt of ₹3.76b at the end of March 2023, a reduction from ₹4.18b over a year. However, it does have ₹24.4b in cash offsetting this, leading to net cash of ₹20.6b.

How Healthy Is Cummins India's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Cummins India had liabilities of ₹18.9b due within 12 months and liabilities of ₹2.70b due beyond that. Offsetting these obligations, it had cash of ₹24.4b as well as receivables valued at ₹16.0b due within 12 months. So it actually has ₹18.8b more liquid assets than total liabilities.

This surplus suggests that Cummins India has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Cummins India has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, Cummins India grew its EBIT by 46% over the last twelve months, and that growth will make it easier to handle its 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 Cummins 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Cummins 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, Cummins India recorded free cash flow worth 62% 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 we empathize with investors who find debt concerning, you should keep in mind that Cummins India has net cash of ₹20.6b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 46% over the last year. So we don't think Cummins India's use of debt is risky. 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. For instance, we've identified 1 warning sign for Cummins India that you should be aware of.

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.