Schaeffler India (NSE:SCHAEFFLER) Has A Pretty Healthy Balance Sheet

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Schaeffler India Limited (NSE:SCHAEFFLER) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, 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.

Check out our latest analysis for Schaeffler India

What Is Schaeffler India's Debt?

The image below, which you can click on for greater detail, shows that at June 2024 Schaeffler India had debt of ₹599.0m, up from ₹546.3m in one year. But on the other hand it also has ₹11.2b in cash, leading to a ₹10.6b net cash position.

How Healthy Is Schaeffler India's Balance Sheet?

The latest balance sheet data shows that Schaeffler India had liabilities of ₹17.0b due within a year, and liabilities of ₹642.4m falling due after that. Offsetting these obligations, it had cash of ₹11.2b as well as receivables valued at ₹13.5b due within 12 months. So it actually has ₹7.05b more liquid assets than total liabilities.

Having regard to Schaeffler India's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the ₹535.4b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Schaeffler India boasts net cash, so it's fair to say it does not have a heavy debt load!

While Schaeffler India doesn't seem to have gained much on the EBIT line, at least earnings remain stable for now. 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 Schaeffler India'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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Schaeffler 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. In the last three years, Schaeffler India's free cash flow amounted to 25% 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 Schaeffler India has ₹10.6b in net cash and a decent-looking balance sheet. So we don't have any problem with Schaeffler India's use of debt. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 1 warning sign we've spotted with Schaeffler India .

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.