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

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. Importantly, Schaeffler India Limited (NSE:SCHAEFFLER) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. 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

How Much Debt Does Schaeffler India Carry?

As you can see below, Schaeffler India had ₹511.0m of debt at December 2023, down from ₹573.8m a year prior. However, it does have ₹15.6b in cash offsetting this, leading to net cash of ₹15.1b.

A Look At Schaeffler India's Liabilities

We can see from the most recent balance sheet that Schaeffler India had liabilities of ₹14.1b falling due within a year, and liabilities of ₹560.1m due beyond that. Offsetting these obligations, it had cash of ₹15.6b as well as receivables valued at ₹11.0b due within 12 months. So it actually has ₹12.0b more liquid assets than total liabilities.

This state of affairs indicates that Schaeffler India's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the ₹671.0b 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!

Schaeffler India's EBIT was pretty flat over the last year, but that shouldn't be an issue given the it doesn't have a lot of debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Schaeffler India 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.

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. Looking at the most recent three years, Schaeffler India recorded free cash flow of 31% 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 ₹15.1b in net cash and a decent-looking balance sheet. So we don't have any problem with Schaeffler India's use of debt. 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. Case in point: We've spotted 1 warning sign for Schaeffler India you should be aware of.

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.