We Think Elgi Equipments (NSE:ELGIEQUIP) Can Stay On Top Of Its Debt

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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, Elgi Equipments Limited (NSE:ELGIEQUIP) does carry debt. But should shareholders be worried about its use of debt?

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Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

What Is Elgi Equipments's Net Debt?

As you can see below, Elgi Equipments had ₹4.91b of debt at March 2025, down from ₹5.61b a year prior. However, its balance sheet shows it holds ₹8.73b in cash, so it actually has ₹3.82b net cash.

How Strong Is Elgi Equipments' Balance Sheet?

According to the last reported balance sheet, Elgi Equipments had liabilities of ₹10.8b due within 12 months, and liabilities of ₹938.0m due beyond 12 months. Offsetting these obligations, it had cash of ₹8.73b as well as receivables valued at ₹6.50b due within 12 months. So it actually has ₹3.47b more liquid assets than total liabilities.

Having regard to Elgi Equipments' size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the ₹176.2b company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that Elgi Equipments has more cash than debt is arguably a good indication that it can manage its debt safely.

Check out our latest analysis for Elgi Equipments

The good news is that Elgi Equipments has increased its EBIT by 9.9% over twelve months, which should ease any concerns about debt repayment. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Elgi Equipments'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. While Elgi Equipments 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, Elgi Equipments recorded free cash flow worth 51% 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 Elgi Equipments has net cash of ₹3.82b, as well as more liquid assets than liabilities. And it also grew its EBIT by 9.9% over the last year. So is Elgi Equipments's debt a risk? It doesn't seem so to us. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Elgi Equipments's earnings per share history for free.

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.

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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.