These 4 Measures Indicate That Timken India (NSE:TIMKEN) Is Using Debt Safely

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, Timken India Limited (NSE:TIMKEN) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Timken India

What Is Timken India's Debt?

As you can see below, at the end of September 2021, Timken India had ₹195.2m of debt, up from ₹166.4m a year ago. Click the image for more detail. However, it does have ₹1.76b in cash offsetting this, leading to net cash of ₹1.57b.

How Strong Is Timken India's Balance Sheet?

According to the last reported balance sheet, Timken India had liabilities of ₹4.88b due within 12 months, and liabilities of ₹1.02b due beyond 12 months. Offsetting these obligations, it had cash of ₹1.76b as well as receivables valued at ₹4.25b due within 12 months. So it can boast ₹119.1m more liquid assets than total liabilities.

This state of affairs indicates that Timken India's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the ₹149.0b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, Timken India boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Timken India grew its EBIT by 41% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Timken India's earnings that will influence how the balance sheet holds up in the future. 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Timken 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. During the last three years, Timken India produced sturdy free cash flow equating to 54% 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 it is always sensible to investigate a company's debt, in this case Timken India has ₹1.57b in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 41% over the last year. So we don't think Timken India's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in Timken India, you may well want to click here to check an interactive graph of its earnings per share history.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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.

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