We Think Cummins India (NSE:CUMMINSIND) Can Manage Its Debt With Ease
Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Cummins India Limited (NSE:CUMMINSIND) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.
Why Does Debt Bring Risk?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.
How Much Debt Does Cummins India Carry?
The image below, which you can click on for greater detail, shows that Cummins India had debt of ₹243.5m at the end of September 2025, a reduction from ₹281.0m over a year. However, its balance sheet shows it holds ₹33.7b in cash, so it actually has ₹33.4b net cash.
A Look At Cummins India's Liabilities
We can see from the most recent balance sheet that Cummins India had liabilities of ₹23.3b falling due within a year, and liabilities of ₹3.16b due beyond that. Offsetting these obligations, it had cash of ₹33.7b as well as receivables valued at ₹25.7b due within 12 months. So it actually has ₹32.9b more liquid assets than total liabilities.
This surplus suggests that Cummins India has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Cummins India boasts net cash, so it's fair to say it does not have a heavy debt load!
See our latest analysis for Cummins India
And we also note warmly that Cummins India grew its EBIT by 19% last year, making its debt load easier to handle. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Cummins India can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Cummins India may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, Cummins India produced sturdy free cash flow equating to 58% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.
Summing Up
While we empathize with investors who find debt concerning, you should keep in mind that Cummins India has net cash of ₹33.4b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 19% over the last year. So is Cummins India's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 1 warning sign for Cummins India that you should be aware of.
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.