These 4 Measures Indicate That Schaeffler India (NSE:SCHAEFFLER) Is Using Debt Reasonably Well

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Schaeffler India Limited (NSE:SCHAEFFLER) makes use of debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

See 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 ₹546.3m at the end of June 2023, a reduction from ₹581.5m over a year. But on the other hand it also has ₹13.9b in cash, leading to a ₹13.4b net cash position.

A Look At Schaeffler India's Liabilities

The latest balance sheet data shows that Schaeffler India had liabilities of ₹14.2b due within a year, and liabilities of ₹481.1m falling due after that. Offsetting this, it had ₹13.9b in cash and ₹10.7b in receivables that were due within 12 months. So it can boast ₹9.90b more liquid assets than total liabilities.

This surplus suggests that Schaeffler India has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Schaeffler India boasts net cash, so it's fair to say it does not have a heavy debt load!

Fortunately, Schaeffler India grew its EBIT by 7.6% in the last year, making that debt load look even more manageable. 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 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. 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. Looking at the most recent three years, Schaeffler India recorded free cash flow of 35% of its EBIT, which is weaker 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 ₹13.4b in net cash and a decent-looking balance sheet. And it also grew its EBIT by 7.6% over the last year. 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. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Schaeffler India you should know about.

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.

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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.