Updated – May 2023
A debt-free company is a company that has zero debt on its balance sheet. Though leverage gives a company the necessary capital to plan and execute its growth, having zero debt on its balance sheet is a sign of strong financials.
A zero debt company has more control over 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 analyze it’s financial health, economic conditions & market growth possibility before investing in a zero debt company.
In the economic conditions of March 2020, lots of companies were feeling the pressure of decreasing income due to the lockdown of major cities in India.
Once the economic situation improves, it is no doubt that a debt-free company will be in a better position to work on increasing income.
Now, before we deep dive into the whole concept of debt-free companies, how to assess and when to invest in them, here is a quick list of top debt-free companies in India
List of top 10 debt free companies in India – Quick List (May 2023)
To be conservative, the below-mentioned list is companies with a large market cap.
Companies that are highlighted in bold are currently good long-term investment picks. Read their detailed analysis in the links provided below.
Also, companies that picked up debt during the last 6 months were removed (like Siemens, Bosch, etc.)
|Name||Market Cap (in Cr.)||Return on capital employed (ROCE) is a financial ratio that ... More %|
|HDFC Life Insu.||116287.22||29.49|
|SBI Life Insu||96649.94||23.39|
|ICICI Pru Life||71066.79||19.30|
Short details about top debt-free companies in India
HDFC Life Insurance
Established in 2000, HDFC Life is a leading long-term life insurance solutions provider in India, offering a range of individual and group insurance solutions that meet various customer needs such as Protection, Pension, Savings, Investment, Annuity, and Health. (source ~ screener.in)
SBI Life Insurance
SBI Life Insurance is a joint venture between the State Bank of India and BNP Paribas Cardif. SBI Life extensively leverages the State Bank Group relationship as a platform for cross-selling insurance products along with its numerous banking product packages such as housing loans and personal loans (source – moneycontrol.com)
ICICI Prudential Life Insurance
ICICI Prudential Life Insurance Co. carries on the business of providing life insurance, pensions, and health insurance products to individuals and groups. Riders providing additional benefits are offered under some of these products. The business is conducted in participating, non-participating and unit-linked lines of businesses. These products are distributed through individual agents, corporate agents, banks, brokers, the Company’s proprietary sales force, and the Company website. (source)
HDFC Asset Management Company
Read detailed analysis of HDFC AMC – a good long-term investment.
HDFC Asset Management Company was approved to act as the Asset Management Company for HDFC Mutual Fund by the Securities and Exchange Board of India (SEBI) vide its letter dated July 03, 2000. HDFC Trustee Company Limited (the Trustee) has appointed the Company to act as the investment manager of HDFC Mutual Fund. (Source)
Gillette India Ltd.
Gillette India is engaged in the manufacturing and sale of branded packaged fast-moving consumer goods in the grooming, portable power, and oral care businesses. This is a brand with strong visibility and recognition in the Indian market.
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 its profitability and growth factors too.
Zero debt on the 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 a 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 the growth factor is something that needs to be analyzed. 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 the growth of the company.
In such a scenario, the company is good but from an 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 are huge variations in returns generated by companies over a span of one year ( and more).
One factor you can look to check the growth factor is an 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 the Introduction Debt to equity ratio is one of the most commonl... More.
The Introduction Debt to equity ratio is one of the most commonl... More is the ratio between the total debt and the total amount contributed by shareholders (equity).
In the case of a zero debt company, this number is zero. Hence, any number closer to zero also indicates a strong self-reliant financial balance sheet.
Something that you can consider for investment by looking at other factors like:
- What is the expected return from the investment of the debt money?
- What is the cost of debt vs expected return?
- Economic conditions can affect the numbers above.
How a company has used the leverage of debt as well as internal cash flows help 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 a company is ‘financially independent from interest rate fluctuations.
- The execution level of such a company is faster compared to other companies that have to keep up with regulatory restrictions of debtors.
- Any company which has increased net income over time and still is 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 leaders 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 the last few years.
This also means that you can check if being debt-free was good for them at such times.
Are these companies good for investment at current prices?
With the overall market growth that has happened in the 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 to their further growth.
A large company is limited by the overall potential of the market for growth. It already has 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.
For example, I have analyzed HDFC AMC as a good long-term investment pick. You can read about it in this post.
Moreover, as you can see, 3 companies are from the insurance sector alone, which is not a fair distribution sector-wise.
Companies with manageable debt
Though being debt-free is a sign of strong finance, all debt is not bad either.
If a company is using debt in a controlled manner as well as for taxation benefits, then it shows the sign of business acumen of such companies.
For such purpose, one of the 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 that are as good as zero debt companies.
Thus, we can filter our list to those companies where the debt/equity ratio is below 1.
It means where the overall equity (assets) of the company is more than the debt of that company.
And on top of that we also use a filter to find stocks with RoE (Return on Equity) of more than 20%, then we have the following set of companies:
The screener used in this query was screener.in
Final thoughts on investing in debt free stocks
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 are 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 a company.
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Frequently Asked Questions
What are the pros and cons of a debt free company?
A debt-free company has strong financials, no interest payments, and the ability to face economic downturns.
On the other hand, A debt-free company has lower EPS (Earnings 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 notifications when we find more companies.
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