Schaeffler India (NSE:SCHAEFFLER) Has A Rock Solid Balance Sheet

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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, Schaeffler India Limited (NSE:SCHAEFFLER) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Schaeffler India

What Is Schaeffler India's Net Debt?

The image below, which you can click on for greater detail, shows that Schaeffler India had debt of ₹607.0m at the end of December 2021, a reduction from ₹650.9m over a year. However, its balance sheet shows it holds ₹13.8b in cash, so it actually has ₹13.2b net cash.

A Look At Schaeffler India's Liabilities

The latest balance sheet data shows that Schaeffler India had liabilities of ₹11.9b due within a year, and liabilities of ₹553.8m falling due after that. On the other hand, it had cash of ₹13.8b and ₹8.76b worth of receivables due within a year. So it can boast ₹10.1b more liquid assets than total liabilities.

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

Better yet, Schaeffler India grew its EBIT by 109% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Schaeffler India will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Schaeffler India 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. During the last three years, Schaeffler India produced sturdy free cash flow equating to 56% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Schaeffler India has net cash of ₹13.2b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 109% over the last year. So is Schaeffler India's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. We've identified 1 warning sign with Schaeffler India , and understanding them should be part of your investment process.

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.