Cummins India (NSE:CUMMINSIND) Seems To Use Debt Rather Sparingly

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, Cummins India Limited (NSE:CUMMINSIND) does carry debt. But the real question is whether this debt is making the company risky.

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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. If things get really bad, the lenders can take control of the business. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is Cummins India's Debt?

The image below, which you can click on for greater detail, shows that Cummins India had debt of ₹296.6m at the end of March 2025, a reduction from ₹1.27b over a year. However, its balance sheet shows it holds ₹34.3b in cash, so it actually has ₹34.0b net cash.

How Strong Is Cummins India's Balance Sheet?

We can see from the most recent balance sheet that Cummins India had liabilities of ₹22.6b falling due within a year, and liabilities of ₹3.49b due beyond that. Offsetting this, it had ₹34.3b in cash and ₹22.9b in receivables that were due within 12 months. So it can boast ₹31.1b 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.

View our latest analysis for Cummins India

Also good is that Cummins India grew its EBIT at 18% over the last year, further increasing its ability to manage debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Cummins India can strengthen its balance sheet over time. 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 Cummins 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, Cummins India recorded free cash flow worth 57% 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 Cummins India has ₹34.0b in net cash and a decent-looking balance sheet. And we liked the look of last year's 18% year-on-year EBIT growth. So we don't think Cummins India's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 1 warning sign for Cummins India that you should be aware of before investing here.

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.