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 things 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 around 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 the 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 making 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 criterion 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, 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 capitalisation.

(Source: Ticker by Finology)

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 capitalisation. 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.

The promoter holding of the company is 72.3%. The PE ratio is 27.34, which indicates that the stock is overvalued. However, the ROCE for the last year has been 64.44%, which is pretty good. TCS reported a sales growth of 17.58% in the last year.

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.

The market capitalisation of HUL is 5,82,557.66 crore, which is the highest when compared to its peers. The company reported profit growth and revenue growth of over 12% and 15% each, respectively.

3. Infosys Ltd.

Infosys Limited is an Indian multinational information technology company that provides business consulting, information technology and outsourcing services. It was founded in Pune in 1981 and is headquartered in Bangalore. It is considered one of the most essential and profitable IT companies in India.

When compared to similar companies in the industry, the company have a good track record of ROE, which is around 32.30%. Moreover, the company has exhibited a sales growth of 20.66% CAGR. With a cash conversion ratio of 93.19, Infosys Ltd. presents a solid front among its peers.

4. Avenue Supermarts Ltd.

Avenue Supermarts Ltd. is an Indian retail corporation that operates a chain of hypermarkets under the "DMart" brand name. It was founded by Radhakishan Damani in 2002 when its first store was opened in Powai, Mumbai.

Avenue Supermarts Ltd. has been generating positive sales and profit growth of 38.30% and 59.36% for the past year. It has also shown a good revenue growth of 19.87% for the past three years. The company has an amazing cash conversion cycle of 16.93 days.

5. Coal India Ltd.

Coal India Ltd., or CIL, was incorporated on November 1, 1973, under the Companies Act, 1956. It is an Indian state-owned coal mining company headquartered in Kolkata, West Bengal, India. It is the world's largest coal producer by volume, accounting for about 15% of global coal production.

The profit grew at a rate of 32.14% over the last year. It portrays a good revenue growth of 31.74% over the last three years.

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? 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 debt. 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: The stocks and companies discussed above aren't a recommendation from Insider by Finology and shall not be construed as a replacement for professional advice. Consult a professional or conduct the necessary research before making investment decisions.