Companies with low or zero debt stand a better chance at surviving than those with high debt.
Debt plays a significant role in the present performance and future growth of any company.
It’s important to know the extent of leverage in a company. This is especially true in these challenging times when many businesses are struggling.
Companies with low or zero debt stand a better chance at surviving than those with high debt.
However, if managed well, debt could help companies meet some of its expenditure. This is true to a certain extent for companies operating in capital-intensive sectors.
Therefore, a company with debt on its books shouldn’t be seen in bad light unless its fundamentals suggest it.
However, if you are an investor with low-risk appetite, then you should stick to fundamentally strong companies with no debt.
In fact, such companies are a gold mine for any investor irrespective of their risk appetite.
In today’s article, we list out the top 5 fundamentally strong companies with zero debt on their books.
#1 Bharat Electronics (BEL)
Bharat Electronics is an Indian Navratna public sector undertaking (PSU).
The company manufactures a range of specialised electronic products for military as well as non-military use.
Its product portfolio can be broadly classified into defence & non-defence. It includes a slew of simple and complex products such as batteries, radars, electronic voting systems, encryptors, etc.
BEL has 9 states of the art manufacturing facilities to cater to the requirements of its clients.
On the R&D front, BEL has 4 R&D centres. It spends an average of 7% of its annual sales on R&D to equip the armed forces with advanced equipment.
The company has been exploring other avenues to diversify its revenue sources. It has entered into a joint venture with General Electric Medical Systems to manufacture medical electronic systems.
Moreover, the company is going to support India’s burgeoning electric vehicle (EV) market. It will manufacture products essential for the EV ecosystem such as li-ion batteries, fuel cells, etc.
BEL is a profitable entity with its sales and profits growing at a CAGR of 9.4% and 6% respectively over the last five years.
Though engaged in a capital-intensive business, BEL doesn’t have any debt on its books.
Since the past two decades, Bharat Electronics has had very minimal or zero debt on its balance sheet.
The company has been able to maintain and slightly improve its operating margins consistently over the years. This just shows that BEL has managed to grow at a steady pace without taking any debt.
#2 Avenue Supermarts (DMart)
Avenue Supermarts is a company that operates in India’s retail sector.
The company operates the chain of DMart stores. DMart focuses on selling a range of FMCG goods such as staples, groceries, dairy products, toiletries, etc.
Mr Radhakishan Damani, a veteran value investor, had a keen understanding of consumer psyche and wanted to test the same.
As a result, DMart was incorporated in 2000 starting off with just one store in Mumbai. Since then, DMart has grown steadily to become one of India’s largest retail chains operating close to 234 stores across India.
What works in the favour of DMart is its focus on providing deep discounts to its customers thereby creating value for them.
DMart has a track record of posting robust financials.
It has grown its revenue and profit at a CAGR of 14.9% and 19.2% respectively over the last five years.
Being an offline retail chain, DMart is required to add more stores if it needs to grow. Adding more stores translates into higher capex for the company.
With no debt on its books, Dmart has been funding its capex through its earnings. This reflects Dmart’s operational efficiency and the strength of its business model.
Avenue Supermarts has incorporated Avenue E-commerce, its wholly owned subsidiary which will compete with emerging online platforms such as JioMart, Amazon Fresh, etc.
The company did have substantial but manageable debt between 2015 to 2019. It reduced it to nil in the financial year 2021.
#3 Relaxo Footwears
Relaxo Footwears is India’s largest manufacturer of footwear products in terms of volume.
The company sold 190 m pairs of footwear in the financial year 2021 despite the challenging environment posed by the pandemic.
Relaxo manufactures a range of products under several brands such as Flite, Sparx, Bahamas, etc.
Headquartered in New Delhi, it has 8 manufacturing plants.
Relaxo has many popular Bollywood stars such as Salman Khan and Akshay Kumar as brand ambassadors of the company.
It boasts of enviable finances with revenue and profit growing at a CAGR of 9.3% and 24.9% respectively over the last five years.
What works in the favour of Relaxo Footwears is its focus on providing its customers with high quality products at an affordable price.
It is imperative for companies like Relaxo Footwear to invest in manufacturing facilities to grow consistently.
However, installing a manufacturing facility is an expensive affair and cost millions of rupees.
Manufacturing companies operating in capital intensive sectors do carry some debt on their books. However, this isn’t the case with Relaxo.
Relaxo is debt free and funds its expenditure through internal accruals. The company is highly efficient and generates sufficient cash from operations to meet its operational and capital expenditure.
#4 Bayer Cropscience
Bayer Cropscience is an Indian subsidiary of Bayer AG, world’s largest pharmaceutical and life sciences company based out of Germany.
The company’s association with India dates back to the 19th century. Since then, it continues to make significant contributions to India’s agriculture and public health.
It provides various products and services through its 3 business divisions: Crop science, pharmaceutical products, and consumer healthcare.
Out of its three divisions, cropscience is the biggest business driver. The company offers products and services such as genetically engineered seeds, and digital farming solutions aimed at empowering farmers with small landholdings.
Bayer markets its pharmaceuticals products via Bayer-Zydus Pharma, a joint venture between Bayer Cropsciences and Zydus Cadila Healthcare. The company manufactures these products at 6 manufacturing facilities across the country.
R&D is at the core of Bayer’s business. The company has established 3 R&D centres In India.
In the financial year 2019-20, the company had a moderate debt of Rs 15 m. However, the company paid off all its debt in the financial year 2020- 2021 and became a debt free company.
On the financial front too, it is an extremely well-managed company. Bayer’s revenue and profit have grown at a CAGR of 9.9% and 11% respectively over the last five years.
Technological innovation continues to be the biggest competitive advantage for the company. Bayer recently used drones for spraying farm fields in Hyderabad.
#5 Grindwell Norton
Grindwell Norton is a subsidiary of French multinational Saint Cobain group. As of December 2021, the group holds 51.6% stake in the company.
Grindwell Norton manufactures a range of technical products via its four business divisions. These products find their application across several industries such as automobiles, jewellery, etc.
The company pioneered the manufacturing of grinding wheels. Grinding wheels are used in industries to smooth out several types of surfaces. These wheels are made up of abrasives, one of the many products manufactured and marketed by Grindwell Norton.
Apart from abrasives, Grindwell Norton is a global leader in geotextiles. Geotextiles are permeable fabrics made up of polyester. These fabrics find their use in critical applications such as coal mining and road reinforcement.
Grindwell Norton manufactures its products across 6 manufacturing facilities in various parts of the country.
The company’s robust financials reflect its leading position in the market. It’s sales and profit figures have grown at a CAGR of 7% and 14.5% respectively over the last five years.
On top of this, the company has been funding its expenses purely through its earnings which implies the company is debt free. It has remained debt free for the past four years.
Snapshot of debt-free stocks in India from Equitymaster’s stock screener
Though we have discussed only 5 stocks, the list doesn’t end here.
The following image shows a list of companies with low or zero debt obtained using Equitymaster’s powerful stock screener.
Please note these parameters can be changed according to your selection criteria.
This will help you in identifying and eliminating stocks that are not meeting your requirements and give emphasis on those stocks that are well inside the metrics.
Should you invest only in debt free companies?
India is a credit averse country. A lot of people in India see debt or credit in a bad light.
However, in the business world such a perception could prove to be counterproductive.
Consider a small company which aims to make a dent in a capital-intensive sector. Suppose, the promoters of this company are adamant to not take on debt even though they need it to fund their capital expenditure.
Wouldn’t such decisions hinder the company’s growth? Of course, it will
You see, taking on debt is no crime. In fact, debt could help companies manage their liquidity and grow faster, especially in their initial stages of growth.
What matters more is prudential management of debt. And that is related to the company’s fundamentals.
So, investing in a company with strong fundamentals along with manageable debt can be a worthy investment.
Any company having debt to equity ratio of less than 1 should be preferred over others. Such companies are in a good place to generate higher returns.
However, the ratio alone doesn’t paint the whole picture.
An investor should follow up with thorough analysis of a company’s fundamentals before investing.
Happy investing!
Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such.
(This article is syndicated from Equitymaster.com)
(This story has not been edited by NDTV staff and is auto-generated from a syndicated feed.)