These 4 Measures Indicate That SKF India (NSE:SKFINDIA) 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. We can see that SKF India Limited (NSE:SKFINDIA) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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 step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for SKF India

What Is SKF India's Net Debt?

The image below, which you can click on for greater detail, shows that SKF India had debt of ₹145.9m at the end of September 2023, a reduction from ₹156.5m over a year. However, its balance sheet shows it holds ₹9.16b in cash, so it actually has ₹9.01b net cash.

How Healthy Is SKF India's Balance Sheet?

According to the last reported balance sheet, SKF India had liabilities of ₹8.03b due within 12 months, and liabilities of ₹403.3m due beyond 12 months. Offsetting these obligations, it had cash of ₹9.16b as well as receivables valued at ₹7.30b due within 12 months. So it can boast ₹8.02b more liquid assets than total liabilities.

This short term liquidity is a sign that SKF India could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that SKF India has more cash than debt is arguably a good indication that it can manage its debt safely.

On the other hand, SKF India saw its EBIT drop by 8.2% in the last twelve months. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine SKF 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. SKF 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. Over the most recent three years, SKF India recorded free cash flow worth 50% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While it is always sensible to investigate a company's debt, in this case SKF India has ₹9.01b in net cash and a decent-looking balance sheet. So we are not troubled with SKF India's debt use. 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 SKF India you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.