Escorts Kubota (NSE:ESCORTS) Seems To Use Debt Quite Sensibly

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 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. As with many other companies Escorts Kubota Limited (NSE:ESCORTS) makes use of debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Escorts Kubota

What Is Escorts Kubota's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Escorts Kubota had ₹486.6m of debt in September 2022, down from ₹552.2m, one year before. However, it does have ₹20.8b in cash offsetting this, leading to net cash of ₹20.3b.

How Strong Is Escorts Kubota's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Escorts Kubota had liabilities of ₹17.3b due within 12 months and liabilities of ₹1.39b due beyond that. Offsetting these obligations, it had cash of ₹20.8b as well as receivables valued at ₹10.1b due within 12 months. So it actually has ₹12.3b 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. Succinctly put, Escorts Kubota boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that Escorts Kubota's load is not too heavy, because its EBIT was down 34% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Escorts Kubota 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Escorts Kubota 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. In the last three years, Escorts Kubota's free cash flow amounted to 40% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Escorts Kubota has net cash of ₹20.3b, as well as more liquid assets than liabilities. So we don't have any problem with Escorts Kubota's use of debt. Over time, share prices tend to follow earnings per share, so if you're interested in Escorts Kubota, you may well want to click here to check an interactive graph of its earnings per share history.

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.