Debt Free Companies in India: Analysis of Debt on Companies Balance Sheet [2022]

[List of Debt-Free Companies] Analysts and investors like stocks of debt free companies. But it does not mean that all companies with debt on their balance sheet are bad. There are companies that use debt to increase their shareholders’ value (ROE). On the contrary, it is also true that not all debt-free companies qualify as good investments.

So, how one can analyze the debt of a company from the perspective of investing in it? This is what we’ll read in this article.

My stock investment philosophy revolves around value investing. For this, I use my Stock Analysis Engine (SAEngine) to estimate the intrinsic value of stocks.

In my early days, I used to think that debt positively effects the comany’s valuations. My assumption was that, as debt increases the company’s liquidity, it should positively effect the intrinsic value. But while I was coding the intrinsic value algorithm, I gained a different understanding.

Before we see other aspects of debt analysis, allow me to show you the impact of debt on intrinsic value (read here).

Topics

List of Top Debt Free Stocks in India 2022

(Updated: 16-Sep-2022)

SLNamePrice52W LowD/EICR[Debt – Cash] (-)veROEGMR Score
1TIPSINDLTD1576.95114701218.27No63.4100
2PAGEIND4884731565.25022.09No54.3797.68
3GMBREW616.1505.508493.87Yes17.0496.74
4NAUKRI4119.3331301051.38Yes95.0595.09
5COLPAL1559.751375.60240.02No74.493.52
6GLAXO1434.11372.050391.29Yes18.3993.21
7BEPL1249802819.43Yes42.0385.23
8SWARAJENG1701.051291.5501923.29Yes37.485.09
9SANOFI6049.9560000699.67Yes44.6584.16
10IEX156.6150.70205.46Yes51.0482.25
  • ICR = Interest Coverage Ratio
Stock Engine - Analyze Stock Here

Impact of Debt on Intrinsic Value

Let’s see the debt of companies through the lens of intrinsic value. To understand this, we must first know two basics about debt:

  • Types of debt: There are two types of debts visible on companies’ balance sheets, (a) Short term debt (under current liability), & (b) Long term debt (under non-current liability).
  • Why company avail debt: Companies generally resort to short-term debt to manage immediate cash flow needs. Short-term debts make the working capital (WC) more liquid. Long-term debts are availed more for the purpose of the company’s expansion plans (CAPEX). Know more about if debt is good or bad for companies.

Both the above type of debt affects the company’s intrinsic value in their own way. Let’s know more about it.

Debt free companies in India - Impact of debt on intrinsic value

Impact of Debt On FCF Formula

The debts that will be settled within the next 12 months from the date of borrowing are short-term (ST) debts. And debts with longer repayment time, greater than 12 months, are long-term (LT) debts.

The impact of both ST & LT debts can be understood more clearly using the FCF formula. Intrinsic value is derived from free cash flow to equity (FCFE). Higher will be the free cash flow to equity (FCFE), and more will be the intrinsic value. The formula to calculate FCFE is this:

Free Cash Flow Formula - Affect of Debt

[P.Note: In the FCFF formula, net new debt is one of the components. But again, while calculating the intrinsic value from FCFFs, the total debt load of the company is first deducted. So in a way, we can say that the influence of debt on intrinsic value is not major. Read more: Difference between FCFF and FCFE]

How does debt affect this FCFE equation? It will have two effects

  • First: The interest bearing on the debt will reduce the net profit (PAT). Reduced PAT will result in lower FCFE, hence lower intrinsic value.
  • Second: Due to debt, the current liability (CL) will increase. An increase in CL will reduce the Working Capital. As a result, the change in non-cash working capital will be negative. It will result in higher FCFE, hence higher intrinsic value.
Free Cash Flow Formula - Affect of Debt - details

So, the net effect on FCFE due to new debt is negligible. A decrease in PAT is offset by the negative change in NCWC. As a result, we can say that the intrinsic value, which is derived from FCFE, remains mostly unaffected by new debt. Read more about the intrinsic value formula here.

Debt-Free Small Cap Stocks

Here is a short list of 10 number debt free small-cap Indian stocks

(Updated: 16-Sep-2022)

SLNameMarket CapPrice52W LowD/EICR[Debt – Cash] (-)veROEGMR Score
1White Organic Agro50.1914.697.108339.69Yes17.67100
2Prism Finance18.7228.818.05016.65Yes64.3693.56
3Swarna Securities5.6419.714.805545.36Yes18.1588.17
4GUJTHEMIS883.85607.3317072.31No50.3587.76
5Aarnav Fashions72.447.953405787.82No14.0786.62
6Neelkanth Rockmineral6.7113.37.903970.39Yes23.9785.03
7TAAL Enterprises512.791650930037.42Yes50.1784.62
8Tyche Industries144.53136.910503579.59Yes23.0882.77
9Vistar Amar115.236061.350361.39No40.5579.91
10ELDEHSG610.58619.95501.6084.06Yes22.7978.82

List of more small-cap debt-free companies

How to Find Quality Debt-Free Companies

While I was coding an algorithm for debt-free companies for my Stock Analysis Engine (SAEngine), it was clear that I’ll include only FCF-positive companies. A debt-free company will be of no value if it is not yielding a positive free cash flow.

People who are not conversant with FCF or intrinsic value estimation can use my “SAEngine” to find quality Indian zero debt companies. It has a prebuilt stock screener that filters fundamentally strong debt free companies.

Allow me to give you an introduction to the parameters used to filter the debt-free stocks:

We take a small hypothetical example of two companies and do an example debt analysis. Suppose there are two companies ABC & XYZ. Just note how the debt of these two companies is compared using the parameters listed below:

Stage #1 Screening
  1. Free Cash Flow (FCF): No company will pass through the filter if its FCF is not positive. This is the first limitation. What’s the logic? There is no point in investing in a company if its FCF, also called the owner’s income, is negative.
  2. Absolute Debt: ABC has a debt of Rs.80 Crore and B has a debt of Rs.120 Crore. Which company looks better here? If we have to look only at debt, Company ABC looks less risky, right? My algorithm uses the debt to market cap ratio to make the absolute debt more comparable with other companies. The lower the D/Mcap ratio the better.
  3. Debt Minus Cash: Suppose Company ABC and XYZ have cash/cash equivalent reserves of Rs.75 Crore and Rs.132 Crore respectively. Debt minus Cash for Company ABC is Rs.5 Crore (80-75). Debt minus Cash for Company XYZ is Rs.-12 Crore (120-132). A negative value for Company XYZ indicates that the company has enough cash to pay off all its debt. Such companies, even if they carry debt, can behave like zero-debt companies. Suggested Reading: Difference between enterprise value and market cap.
Stage #2 Screening
  1. Debt Equity Ratio (D/E): Now suppose, Net worth of ABC is Rs.80 Crore and the Net worth of XYZ is Rs.120 Crore. This means, that the debt-equity ratio (D/E) of ABC is 1 (80/80) and that of XYZ is also 1 (120/120). So which company is better? The Thumb rule is that the lower the debt-to-equity ratio the better. Zero DE companies are called zero debt stocks. Read more: Debt to equity ratio interpretation.
  2. Interest Coverage Ratio (ICR): It is a ratio between EBIT and Interest. The higher the ICR ratio the better. Generally speaking, ICR above three is considered safe. Companies having double-digit or higher ICR can behave like zero debt companies.
  3. Return on Equity (ROE): Good companies take debt to improve their shareholders’ returns. High ROE, with debt, is an indicator that the company is using its debt well. Read more about ROE calculation.
  4. Return on Capital Employed (ROCE): Too much debt can hamper the company’s D/E, ICR, and also its ROCE. ROCE is a measure of the company’s profitability. A company with debt but displaying a higher ROCE can be treated as a zero debt company. Read more about the ROCE formula.

Frequently Asked Questions (FAQs)

1. What is a debt-free company

A company declares its debt load on its balance sheet. When shows zero values are shown against short-term and long-term borrowings, it represents a debt-free company.

2. How do I know quickly know if a company is debt free?

The quickest way to do it is by looking at the company’s debt-to-equity ratio. A zero DE ratio company is certainly free of any debt load.

3. Which penny stocks are debt free?

Here is a list of small-cap stocks that carry almost zero debt. Few penny stocks are also included in the list.

4. Are debt-free companies good?

Companies with debt on their balance sheet, during troubled times, are more likely to turn bankrupt. Hence are considered a more risky investment. Debt-free companies with healthy fundamentals are more secure for investing.

5. Is DMart debt free?

From Mar’2020 onwards, DMart has reported zero debt on their balance sheets. So, yes, as on 2022, it is a debt-free company.

6. Which are the most cash-rich companies in India?

In terms of cash and cash-equivalent, these five companies most cash on their balance sheet. HDFC (Rs.2,43,218 Crores), Reliance Ind. (Rs.1,44,296 Crores), Max Financial (Rs.1,10,593 Crores), Tata Motors (Rs.63,378 Crores), and L&T (Rs.48,745).

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MANI

MANI

Hi. I’m Mani, I’m an Engineering graduate who in pursuit of financial independence, has converted into a full time blogger. After working in the corporate world for almost 16+ years, I bid it adieu....read more

22 Responses

  1. Post article on purchasing of commercial property.
    Instead of purchasing of bigger size house can we diversify it as small size + 1 commercial property ? What is your opinion ?

  2. I like the article on this website very much. Very important information is found in this blog. Which is much better than other blogs.

  3. sir my small suggestion to identify the stock selection some of the other criteria we can look on it 1.Institution holdings,2.promoters pledge,3.market cap.please give me the advice apart from excel sheet we will check these things sir and also final query regarding these stock selection once we bought how random again we have to check please revert back to me i am beginner i spent around thousands of rupees to learn fundamentals but not worth it. i spent two days on your blog and article really very informative and i wanted to purchase the excel software.can i have your contact no sir

  4. I am reading a blog on this website for the first time and I would like to tell you that the quality of the article is up to the mark it is very well written. Thank you so much for writing this article and I will surely read all the blogs from now on. Thank you so much for caring about your content and your readers.

  5. Hi Mani, By reading your article I understood technically what is debt free stocks actually. Thanks for sharing information. Quite helpful and easy to understand

      1. Sir earlier there were excel sheets of these debt companies, fastest growing companies and highest return on capital companies. Can you please start uploading those excel sheets again? They become handy and useful. Thanks

  6. its very informative sir. it helped me a lot as i am starting beginner , the information about fundametals of company is most important auspect for investment in equity market. plz continue your valuable research on financial market

  7. CAN YOU PLEASE CLARIFY IN THE FORMULAS, WHAT ARE THE LINE ITEMS FROM THE BALANCE SHEET THAT HAVE BEEN CONSIDERED FOR DEBT AND CASH CALCULATION

  8. Very very good information and explanation.
    As a new investor, i could understand how to find a quality stocks in a lucid manner.
    Adding more parameter for value investing is welcomeworthy.

  9. Very much informative details. Thank you.
    Please add details of 5, 10 & 15 year growth rate%. It will more informative.

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