How to find Debt free Companies in India?

Debt can simply make or break a business. It can either take you to the top, as in the case of companies like Ford or Apple. Or it can simply destroy the company, as in the case of KingFisher and Essar Steel.

While debt signifies that the company is working for a prosperous future, everything drives down to whether the company will be able to pay it in the end. And that is the key reason why intelligent investors take a close look at the debt of the companies before considering investing.

One metric you can rely on in order to help you find companies with a lower debt burden is the Debt-to-Equity ratio. And we will tell you exactly how to do it.

Debt-to-Equity Ratio

Cash or capital forms the base of any business. Any business needs capital to carry on with their daily activities, to expand and to implement new ideas. So, businesses fetch this capital either via issuing securities like stocks, debt, etc or by borrowing from a bank or financial institution. While companies claim this as leveraging, investors look at it as a debt.

So, how do you know if the debt which the company holds is desirable or not? All you have to do is quickly run the calculation of the debt-to-equity ratio. This tells you if the debt of the company is desirable or risky. It establishes a relationship between the liabilities and the shareholder’s equity.

In simple terms, Debt-to-Equity ratio = Total liabilities/shareholder’s equity

Total liabilities include all the borrowing of the company from banks and financial institutions, short-term debt and long-term debt. Shareholders equity is calculated by deducting liabilities from the total of assets.

A higher ratio implies that the company is risky for investment. On the other hand, a lower ratio implies that the business is less reliant on external sources of funds for its growth and development. Generally, anything below 1.5 is considered good.

As the entire process might turn out to be tedious, we have an efficient and easy alternative. Aren’t you curious to know what it is? If yes, then quickly go to Ticker and click on the screener icon on the right of your screen. You will be directed to something like below. 

And now, enter the query you want to use to filter companies and boom… you have it all within seconds!

Ways to Find a Debt-Free Company

Yes, the Debt-to-Equity ratio is certainly the most essential metric to look for while checking the debt of a company. But, relying on just one figure isn’t always the ideal choice. Along with the D/E ratio, you should also use these methods to weed out the companies with humongous debt:

• Use a stock screener: Stock screeners allow you to filter companies based on their debt levels. This method is already discussed above, so try it on for yourself by visiting Ticker’s screener.
• Read financial statements: You can also find debt-free companies by reading their financial statements. The balance sheet will show you the company's total debt and liabilities. If the company's debt is zero, then it is considered a debt-free company.
• Follow financial news: You can also find debt-free companies by following financial news. Financial news websites and publications often report on companies that are debt-free or have low debt levels.
• Look for companies with strong cash flows: Companies with strong cash flows are more likely to be debt-free. This is because they are able to generate enough cash to pay off their debts.
• Avoid companies with high levels of leverage: Leverage is a measure of a company's debt compared to its equity. Companies with high levels of leverage are more likely to be at risk of defaulting on their debts.
• Check company websites: Some companies will list their debt levels on their websites. This information can be found in the investor relations section of the website.

How Important is Debt in Analysing a Stock?

Yes, one cannot rule out the fact that debt helps a company grow and develop. But what if it goes beyond the limit? It’s like eating more than your tummy can hold. In both cases, you will be landing in trouble ultimately. Certain companies do handle it well, but most of them give in to the pressure that builds because of heavy loans. And as an investor, you are at a loss. 

Further, when a company is borrowing from banks or financial institutions, they levy them with interest. Hence, the repayment amount gets bigger and bigger with time. This will consume most of the company’s profits. On the other hand, a debt-free company can redirect its profits in its operations or offer you a dividend with the same. In short, they will have more cash at their disposal. 

Adding to that, constantly changing interest rates and uncertainty might affect their operations. For instance, the covid was crucial to many companies. A company with lesser debt would have had better freedom to make drastic decisions than the ones with higher debts. 

Benefits of Debt-Free Stocks

We are pretty sure you now have an idea of how bad debt can turn out for a company. You might now be intrigued to ask us, what’s in it for me? The answer is ‘a lot’. And we have listed them below, 

• First and foremost, the company becomes self-reliant. This means they are in a better position to generate returns for their stakeholders. 
• Debts are really costly and might affect the business of the company. This indirectly affects the returns you might fetch. 
• The company also offers a good dividend yield for the stockholders. 
• If, in the future, the company plans to undertake some huge developmental plans, it would enjoy lower interest from the banks and high trust.

Having said that, is it possible to find companies that have a lesser or close to "0" Debt-to-Equity ratio? Absolutely. The below picture shows you a list of companies that fall under this category. You can simply log in to Ticker for free and find many more companies like this. 

Certain Precautions to be Taken

Is every debt-free company a good one? Depends. Hence, an investor, while selecting a debt-free company or a company with lower debt, must exercise caution about the following factors.

• The nature of the industry plays a crucial role here. Certain industries cannot run the business without taking debt. For instance, steel, cement, etc. In such cases, eliminating only on the basis of a single aspect might be misleading.
• Not viewing other risk factors is also troublesome. Blindly following a debt-free company is not advisable. The company might have risk disguised in some other form. 
• Overlooking the potential of a business is also another mistake that investors make while involved in the selection of the right stock. 

The Bottom Line

So, fellow investors, ensure you get all the points discussed above while making a selection of stocks. Filter rightly and as per your needs and demands. If you find the process tiresome, don’t worry. Simply click on Ticker and sort it out in seconds because it all boils down to one right decision in order to make your future financially independent.

Happy investing!