Updated – April 2020
A debt free company is a company which has zero debt on its balance sheet. Though leverage gives a company necessary capital to plan and execute its growth, having zero debt on its balance sheet is sign of strong financials.
A zero debt company, has more control on its finances as they don’t have an outside loan to service. Thus, they are fast in execution and more self reliant about decision making.
Please note: Just because a company is debt free, doesn’t make it invest worthy on its own. You need to analyse it’s financial health, economic conditions & market growth possibility before investing into a zero debt company.
In current economic conditions of March 2020, lots of companies are feeling the pressure decreasing income due to lockdown of major cities on India. This includes banking sector also.
Once the situation improves, it is no doubt that a debt-free company will be in a better position to work on increasing income.
- 1 Is a debt free company a good investment?
- 2 List of top 10 debt free companies in India – January 2020
- 3 Companies with manageable debt
- 4 Final thoughts
- 5 Frequently Asked Questions
Is a debt free company a good investment?
What you need to look for when you are evaluating a company for long term investing is it’s profitability and growth factors too.
Zero debt on balance sheet shows that the company is free from financial liabilities, which in most cases means higher profit as compared to any company which has to service its loans.
Due to inflation and interest rates in India, servicing loans from financial point of view can be a costly affair. Whereas a debt free company is totally free from any such expense or financial planning for spending on interests.
But, the other factor which is growth factor is something that needs to be analysed. Sometimes, in their jest to stay debt free, a company can let go of investing in the future capacity and expansion. This can lead to missing out on growth of the company.
In such scenario, the company is good but from investment perspective you don’t have a good option here. Hence, you need to look into the company from both these perspectives.
You can also look at the list below to see that, despite zero debt there is huge variations in returns generated by companies over span of one year ( and more).
One factor you can look to check the growth factor is increase in ‘Total Income’ of the company over time.
Should I avoid the companies with debt on their books?
No, you should not.
There are many situations when it is not easy for a company to expand without debt. Though this article is about zero debt companies, it is still important to know about something called debt to equity ratio.
Debt to equity ratio is ratio between the total debt and total amount contributed by shareholders (equity).
In case of a zero debt company, this number is zero. Hence, any number closer to zero also indicate a strong self reliant financial balance sheet.
Something that you can consider for investment by looking at other factors like:
- What is expected return from investment of the debt money?
- What is the cost of debt vs expected return?
- Economic conditions which can effect the numbers above.
How a company has used the leverage of debt as well as internal cash flows helps to decide about the quality of management and thus fundamentals of the company.
Why debt free companies are preferred for investment
Any company with zero net debt on its balance sheet is preferred for investing because:
- Such company is ‘financially independent’ from interest rate fluctuations.
- Execution level of such company if faster as compared to other companies who have to keep up with regulatory restrictions of debtors.
- Any company which has increased net income over the time and still being debt free is ideal for long term investment as it shows strong fundamentals.
- Moreover in unicorn cases, the company is cash positive without any debt because they are leader in their field and are able to charge a consistent premium on their products. For example, Apple has a famous premium product and its sales are consistent (or growing) over last few years.
List of top 10 debt free companies in India – January 2020
To be conservative, below mentioned list are companies with large market cap.
The returns mentioned here are until February 2020. These numbers have changed when overall stock markets crashed in the wake of coronavirus pandemic.
This also means that you can check if being debt free was good for them at such times.
|Name||Market Cap (in Cr.)||ROCE %||1 Year Return %|
|HDFC Life Insu.||116287.22||29.49||45.21|
|SBI Life Insu||96649.94||23.39||68.72|
|ICICI Pru Life||71066.79||19.30||55.53|
Are these companies good for investment at current prices?
With overall market growth that has happened in last few years, few of these companies are not at fair value as compared to their current market prices.
On top of that, as you can see, many of the companies listed above are large cap. Which is a hindrance in their further growth.
A large company is limited by overall potential of market for growth. It already have a good market share and getting more doesn’t come easy.
Thus a complete analysis is required before investing in any of the companies listed above.
More over as you can see, 3 companies are from insurance sector alone, which is not a fair distribution sector wise.
Companies with manageable debt
Though being debt free is sign of strong finance, all debt is not bad either.
If a company is using debt in controlled manner as well as for taxation benefits, then it shows the sign of business acumen of such companies.
For such purpose, one of terms used in fundamental research of companies is Debt/Equity Ratio.
It means: Debt on the company/Equity of the company
Though, this ratio below 1.5 is considered good. But our aim here is to find companies which are as good as zero debt companies.
Thus, we can filter our list to those companies where debt/equity ratio is below 1.
It means where overall equity (assets) of the company are more than debt of that company.
And on top of that we also use filter to find stocks with RoE (Return on Equity) more than 20%, then we have the following set of companies:
The screener used in this query was screener.in
A debt-free company is preferred, but that is good only when cash flow is strong.
If a company has zero debt at the cost of growth then you are stuck with the slow-growing company.
Thus, a balance needs be there between debt and growth.
The financial strength of a company can be judged by important financial ratios. Along with that, the overall business model needs to be considered when researching about a company.
Frequently Asked Questions
What are the pros and cons of a debt free company?
A debt-free company has strong financials, no interest payment and the ability to face economic downturns.
On ther other hand, A debt-free company has lower EPS (Earning per share). This is also because a company without debt is not able to use certain tax benefits.
A good company has low debt which it can service and also can take tax benefits to improve overall growth and profitability
How to find debt free companies in India?
You can use any of the stock screeners and create a list of companies with zero or little debt.
Screeners like screener.in, equitymaster, moneycontrol have an extensive database to provide this data at the click of a button.
You can also subscribe to our newsletter to receive notification when we find more companies.
tags: debt free companies in India, zero debt companies in India, debt free companies