We Think Honeywell Automation India (NSE:HONAUT) Can Stay On Top Of Its Debt

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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Honeywell Automation India Limited (NSE:HONAUT) makes use of debt. But is this debt a concern to shareholders?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.

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 ₹464.0m of debt at September 2022, down from ₹645.7m a year prior. But it also has ₹21.0b in cash to offset that, meaning it has ₹20.5b net cash.

A Look At Honeywell Automation India's Liabilities

According to the last reported balance sheet, Honeywell Automation India had liabilities of ₹11.1b due within 12 months, and liabilities of ₹537.2m due beyond 12 months. Offsetting this, it had ₹21.0b in cash and ₹8.35b in receivables that were due within 12 months. So it actually has ₹17.7b 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. 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.

But the other side of the story is that Honeywell Automation India saw its EBIT decline by 4.4% over the last year. That sort of decline, if sustained, will obviously make debt harder to handle. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Honeywell Automation India will need earnings to service that debt. 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. 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 59% 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 it is always sensible to investigate a company's debt, in this case Honeywell Automation India has ₹20.5b 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.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.