Howard Marks said it well when he said that, rather than worrying about stock price volatility, “the possibility of permanent loss is the risk I worry about…and that every practical investor that I know is worried”. So it may be obvious that you need to take debt into account when thinking about the risk of a given stock, because too much debt can sink a business. We note that Kubota Escorts Limited (NSE:ESCORTS) has debt on its balance sheet. But the more important question is: what risk does this debt create?
When is debt a problem?
Debt and other liabilities become risky for a business when it cannot easily meet those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. However, a more frequent (but still costly) event is when a company has to issue shares at bargain prices, permanently diluting shareholders, just to shore up its balance sheet. By replacing dilution, however, debt can be a great tool for companies that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business has is to look at its cash and debt together.
Check out our latest analysis for Kubota Escorts
What is Escorts Kubota’s net debt?
The image below, which you can click on for more details, shows that Escorts Kubota had a debt of ₹519.5 million at the end of March 2022, a reduction from ₹606.1 million year on year . But he also has ₹46.8 billion in cash to offset this, meaning he has a net cash of ₹46.3 billion.
A Look at the Responsibilities of Kubota Escorts
Zooming in on the latest balance sheet data, we can see that Escorts Kubota had liabilities of ₹13.6 billion due within 12 months and liabilities of ₹1.56 billion due beyond. On the other hand, it had a cash position of ₹46.8 billion and ₹8.15 billion in receivables due within a year. It can therefore boast of ₹39.9 billion more liquid assets than total Passives.
It’s good to see that Escorts Kubota has plenty of cash on its balance sheet, which suggests careful liability management. Due to her strong net asset position, she is unlikely to run into problems with her lenders. Simply put, the fact that Escorts Kubota has more money than debt is probably a good indication that she can manage her debt safely.
In fact, Escorts Kubota’s saving grace is its low level of leverage, as its EBIT has fallen 30% in the last twelve months. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. When analyzing debt levels, the balance sheet is the obvious starting point. But ultimately, the company’s future profitability will decide whether Escorts Kubota can strengthen its balance sheet over time. So if you are focused on the future, you can check out this free report showing analyst earnings forecast.
Finally, a company can only repay its debts with cold hard cash, not with book profits. Escorts Kubota may have net cash on the balance sheet, but it’s always interesting to see how well the company converts its earnings before interest and taxes (EBIT) into free cash flow, as this will influence both its need and its ability. . to manage debt. Over the past three years, Escorts Kubota has had free cash flow of 43% of EBIT, which is lower than expected. This low cash conversion makes debt management more difficult.
Summary
While we sympathize with investors who find debt a concern, you should bear in mind that Escorts Kubota has a net cash position of ₹46.3 billion, as well as more liquid assets than liabilities. So we have no problem with the use of debt by Escorts Kubota. The balance sheet is clearly the area to focus on when analyzing debt. However, not all investment risks reside on the balance sheet, far from it. Be aware that Escorts Kubota shows 2 warning signs in our investment analysis you should know…
In the end, it’s often best to focus on companies that aren’t in debt. You can access our special list of these companies (all with a track record of earnings growth). It’s free.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.
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