Is Transport Corporation of India (NSE:TCI) A Risky Investment?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Transport Corporation of India Limited (NSE:TCI) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Transport Corporation of India

How Much Debt Does Transport Corporation of India Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Transport Corporation of India had ₹1.70b of debt, an increase on ₹1.16b, over one year. However, its balance sheet shows it holds ₹3.37b in cash, so it actually has ₹1.68b net cash.

How Healthy Is Transport Corporation of India's Balance Sheet?

The latest balance sheet data shows that Transport Corporation of India had liabilities of ₹3.92b due within a year, and liabilities of ₹1.91b falling due after that. Offsetting these obligations, it had cash of ₹3.37b as well as receivables valued at ₹6.71b due within 12 months. So it can boast ₹4.25b more liquid assets than total liabilities.

This short term liquidity is a sign that Transport Corporation of India could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Transport Corporation of India boasts net cash, so it's fair to say it does not have a heavy debt load!

Transport Corporation of India's EBIT was pretty flat over the last year, but that shouldn't be an issue given the it doesn't have a lot of debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Transport Corporation of India can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Transport Corporation of 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. Looking at the most recent three years, Transport Corporation of India recorded free cash flow of 47% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Transport Corporation of India has net cash of ₹1.68b, as well as more liquid assets than liabilities. So we are not troubled with Transport Corporation of India's debt use. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 1 warning sign we've spotted with Transport Corporation of India .

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.