Escorts Kubota (NSE:ESCORTS) Has A Pretty Healthy Balance Sheet

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Escorts Kubota Limited (NSE:ESCORTS) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

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When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Escorts Kubota's Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2025 Escorts Kubota had ₹1.05b of debt, an increase on ₹530.9m, over one year. But it also has ₹32.5b in cash to offset that, meaning it has ₹31.5b net cash.

How Healthy Is Escorts Kubota's Balance Sheet?

We can see from the most recent balance sheet that Escorts Kubota had liabilities of ₹24.9b falling due within a year, and liabilities of ₹2.48b due beyond that. Offsetting this, it had ₹32.5b in cash and ₹13.4b in receivables that were due within 12 months. So it actually has ₹18.6b more liquid assets than total liabilities.

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

See our latest analysis for Escorts Kubota

But the other side of the story is that Escorts Kubota saw its EBIT decline by 7.4% over the last year. That sort of decline, if sustained, will obviously make debt harder to handle. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Escorts Kubota'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 Escorts Kubota 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, Escorts Kubota produced sturdy free cash flow equating to 68% of its EBIT, about what we'd expect. 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 Escorts Kubota has net cash of ₹31.5b, as well as more liquid assets than liabilities. The cherry on top was that in converted 68% of that EBIT to free cash flow, bringing in ₹7.5b. So we don't think Escorts Kubota'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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Escorts Kubota you should know about.

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.