Is Honeywell Automation India (NSE:HONAUT) A Risky Investment?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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 Honeywell Automation India Limited (NSE:HONAUT) does use debt in its business. But should shareholders be worried about its use of debt?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Honeywell Automation India

What Is Honeywell Automation India's Debt?

You can click the graphic below for the historical numbers, but it shows that Honeywell Automation India had ₹557.4m of debt in March 2022, down from ₹738.9m, one year before. But on the other hand it also has ₹20.1b in cash, leading to a ₹19.5b net cash position.

How Strong Is Honeywell Automation India's Balance Sheet?

The latest balance sheet data shows that Honeywell Automation India had liabilities of ₹11.1b due within a year, and liabilities of ₹643.1m falling due after that. Offsetting this, it had ₹20.1b in cash and ₹13.9b in receivables that were due within 12 months. So it actually has ₹22.2b more liquid assets than total liabilities.

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

The modesty of its debt load may become crucial for Honeywell Automation India if management cannot prevent a repeat of the 28% cut to EBIT over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. There's no doubt that we learn most about debt from the balance sheet. 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 company can only pay off debt with cold hard cash, not accounting profits. Honeywell Automation 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. 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 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 Honeywell Automation India has ₹19.5b in net cash and a decent-looking balance sheet. So we don't have any problem with Honeywell Automation India's use of debt. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Honeywell Automation India's earnings per share history for free.

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.