These 4 Measures Indicate That Escorts Kubota (NSE:ESCORTS) Is Using Debt Safely

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.' 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. Importantly, Escorts Kubota Limited (NSE:ESCORTS) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, 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.

See our latest analysis for Escorts Kubota

How Much Debt Does Escorts Kubota Carry?

As you can see below, Escorts Kubota had ₹530.9m of debt at March 2024, down from ₹573.0m a year prior. However, its balance sheet shows it holds ₹30.9b in cash, so it actually has ₹30.3b net cash.

How Strong Is Escorts Kubota's Balance Sheet?

We can see from the most recent balance sheet that Escorts Kubota had liabilities of ₹18.7b falling due within a year, and liabilities of ₹2.22b due beyond that. Offsetting this, it had ₹30.9b in cash and ₹11.9b in receivables that were due within 12 months. So it actually has ₹21.8b more liquid assets than total liabilities.

This short term liquidity is a sign that Escorts Kubota could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Escorts Kubota boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Escorts Kubota grew its EBIT by 31% 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 ultimately the future profitability of the business will decide if Escorts Kubota can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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. In the last three years, Escorts Kubota's free cash flow amounted to 48% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Escorts Kubota has ₹30.3b in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 31% over the last year. So is Escorts Kubota's debt a risk? It doesn't seem so to us. 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.

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.