Top 5 Debt Free Companies 2023

“Instead of focusing on where you can make 500% in the next 6 months, invert that and find situations where you can’t lose over the next few years. The latter is often where you will find the next multi-bagger.”

This quote by Ian Cassel is really worth a billion dollars. Many times, investors keep running behind higher return-generating assets, but truth be told, the real treasure is in finding where you can’t lose wealth in the long run! And one such criterion to filter out stocks is Debt.

First thing first, the capital structure of any company mainly comprises equity & debt. A company can forgo the debt part and operate only on the share capital, but the other way round is practically not possible. So if the debt is avoidable, do companies with zero debt thrive? Let’s find out.

Today’s article is an attempt to help you understand what a company with zero debt means, along with a list of 5 such debt-free picks in India that surely deserve your attention.

Debt Free Companies!

A company that either hasn’t borrowed funds from third parties like banks, financial institutions and debt securities to carry on its operations or has repaid any such credit borrowed in the past, is known as a Debt-free company. In other words, it means that a company's only source of funds is the share capital.

There is another similar concept known as Net debt-free company, also called the virtually debt-free company. For instance, if a company currently has a debt of Rs.100 crore and a cash balance of Rs. 70 crore, the net debt would be Rs. 30 crores. A net debt-free company simply means that the amount of liquid cash is available with the company to pay off the debts, but it does not necessarily mean that the company has repaid all borrowings.

Hence, we’ll be exploring actual Debt-free companies (and not virtual). Speaking of debt-free, we’ll talk about long-term debts today. Let’s keep short-term ones for some other day.

Why are Debt free companies good?

A debt-free company directly translates to higher profits as the company is free from any fixed expenses in the form of interest. Zero debt reflects the strength of the balance sheet. It is indeed a good sign. Usually, companies that borrow large sums of debt need their creditors' approval before taking certain decisions. Being debt-free ensures quick decision making. Also, when the revenue generation of a company is not satisfactory, being debt-free relieves the company from the burden of regular interest payments and repayments of principal. So, now you know.

How to identify Debt free companies?

Obviously, the first criteria would be that debt should be zero. Or in financial terms, the Debt-to-Equity ratio should be Zero.

Additionally, another component known as the interest coverage ratio helps one determine if the company is earning sufficient profits to repay the interest component of the debt lying on its balance sheet. The ideal interest coverage ratio depends upon the industry and the size of operations, but in general practice, a ratio above 3 is considered ideal. So, when looking for a debt-free company, surely consider an ICR of more than 3.

Now that we know that a debt-free company is a good one to invest in, is looking for that one criterion sufficient? Let's find out.

Apart from being debt-free, there are other factors that an investor must definitely consider. To simplify things for our readers, we ran a query on a good stock screener to find debt-free companies, and included some additional filters like ROCE, ROE, revenue & earning growth & Market Capitalization.

(Source: Ticker)

Top 5 Debt free Companies 

So, here’s a list of the five most popular companies out of the ones screened:

1. Tata Consultancy Services Ltd.

An important part of the Tata Group, TCS, is the largest IT services company in the world in terms of market capitalization. It is operational across 46 countries. The company along with 67 of its subsidiaries provide a large range of products and services like BPO, enterprise software, capacity planning, consulting, etc.

(Source: TCS)

The promoter holding of the company is 72.19%. The PE ratio is 35.67 which indicates that the stock is overvalued. However, the ROCE for the last year has been 56.24%, which is pretty good. TCS reported a sales growth of only 3.55% in the last year, but 11.78% in the last 3 years. 

2. Hindustan Unilever Ltd.

Hindustan Unilever Ltd. or HUL is an Indian company with a product list of over 35 brands including beverages, personal care products, cleaning agents, water purifiers, etc. Incorporated in the year 1933, HUL is headquartered in Mumbai, India.

(Source: HUL)

The market capitalization of HUL is 5,48,570.25 crore, which is the highest when compared to its peers. The company reported a profit growth and revenue growth of around 18% each, respectively. The Return on Assets (ROA) stands at 18.19% assures better efficiency in generating profits.

3. Jubilant FoodWorks Ltd.

Operating in the F&B industry, Jubilant FoodWorks Ltd. was incorporated in the year 1995 as a part of Jubilant Bhartia Group. The company has the master franchisee for Domino’s Pizza in India, Bangladesh, Nepal, and Dunkin Donuts in India. It is one of the largest foodservice companies in India.

(Source: JUBLFOOD)

When compared to similar companies in the industry, the company does have a higher EPS, which is fairly good. Moreover, the company has exhibited a profit growth of a whopping 60% CAGR in the past 3 years. It is also to be noted that its peers like Britannia Inds and Marico do have large sums of debts on their balance sheets.

4. L&T Technology Services Ltd.

L&T Technology Services Ltd. is a subsidiary of Larsen & Toubro, providing engineering services. The company specialises in disruptive technology spaces such as Artificial Intelligence, Digital Factory, 5G, etc. It serves customers worldwide. The company went public in the year 2016.

(Source: LTTS)

The sales and profit growth over the last 3 years is 12.28% and 11.21% respectively. The ROE stands at 22.84%, which is definitely on the higher side when compared to its contemporaries. But the company has a high PE ratio of 50.38 which is undesirable as it indicates overvaluation of the stock.

5. Indian Railway Catering and Tourism Corporation Ltd. (IRCTC)

IRCTC was established as a PSU fully owned by the Government of India. It is a subsidiary of the Indian Railways that provides services like online ticketing, catering, tourism and drinking water at stations and on trains. The company also operates a few trains as a private player. Though the company opened for public funding in 2019, the government still owns the majority of the stake which is around 67.4%.

(Source: IRCTC)

Compared to its peers, IRCTC is the largest in terms of market cap. The ROCE is also the highest. The profit grew at a rate of 71.3% over the last year. The current ratio is 1.54 at present, which means the current assets and current liabilities are well-balanced.

The Bottom Line

We've had a sneak peek into the 5 popular debt-free companies that are worth considering for further research. But is debt-free the only thing to go for is the question here. Though a company having no debts is good, it need not be the only deciding factor. Borrowing debt can sometimes be advantageous too. The interest payment reduces the tax liability of the company. Also, debt is easier to procure than public funds. So the bottom line is that everything boils down to how a company manages its debt component. And that is, anyway, for time to tell.

What you can do is be careful of companies having exorbitant amounts of debts. Or simply, if you can, filter out good companies that have zero debts. Don’t you think you’ll find a better hedge there? Tell us.

*Disclaimer: This should not be construed as investment advice. Invest only after proper research