Honeywell Automation India (NSE:HONAUT) Seems To Use Debt Quite Sensibly

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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 Honeywell Automation India Limited (NSE:HONAUT) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Honeywell Automation India

What Is Honeywell Automation India's Net Debt?

As you can see below, Honeywell Automation India had ₹645.7m of debt at September 2021, down from ₹714.6m a year prior. However, its balance sheet shows it holds ₹19.0b in cash, so it actually has ₹18.3b net cash.

A Look At Honeywell Automation India's Liabilities

The latest balance sheet data shows that Honeywell Automation India had liabilities of ₹13.3b due within a year, and liabilities of ₹629.4m falling due after that. Offsetting this, it had ₹19.0b in cash and ₹8.80b in receivables that were due within 12 months. So it actually has ₹13.9b more liquid assets than total liabilities.

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

But the bad news is that Honeywell Automation India has seen its EBIT plunge 20% in the last twelve months. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Honeywell Automation India's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Honeywell Automation 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, Honeywell Automation India produced sturdy free cash flow equating to 58% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Honeywell Automation India has net cash of ₹18.3b, as well as more liquid assets than liabilities. So we are not troubled with Honeywell Automation India's debt use. Over time, share prices tend to follow earnings per share, so if you're interested in Honeywell Automation India, you may well want to click here to check an interactive graph of its earnings per share history.

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.