Does Elgi Equipments (NSE:ELGIEQUIP) Have A Healthy Balance Sheet?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. Importantly, Elgi Equipments Limited (NSE:ELGIEQUIP) does carry debt. But the more important question is: how much risk is that debt creating?

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What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Elgi Equipments's Net Debt?

As you can see below, Elgi Equipments had ₹4.25b of debt at September 2025, down from ₹4.54b a year prior. However, its balance sheet shows it holds ₹8.60b in cash, so it actually has ₹4.35b net cash.

How Strong Is Elgi Equipments' Balance Sheet?

We can see from the most recent balance sheet that Elgi Equipments had liabilities of ₹10.6b falling due within a year, and liabilities of ₹1.06b due beyond that. Offsetting this, it had ₹8.60b in cash and ₹6.24b in receivables that were due within 12 months. So it actually has ₹3.15b more liquid assets than total liabilities.

This short term liquidity is a sign that Elgi Equipments could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Elgi Equipments boasts net cash, so it's fair to say it does not have a heavy debt load!

View our latest analysis for Elgi Equipments

The good news is that Elgi Equipments has increased its EBIT by 5.0% over twelve months, which should ease any concerns about debt repayment. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Elgi Equipments's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Elgi Equipments 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, Elgi Equipments produced sturdy free cash flow equating to 65% 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 Elgi Equipments has net cash of ₹4.35b, as well as more liquid assets than liabilities. So is Elgi Equipments's debt a risk? It doesn't seem so to us. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Elgi Equipments's earnings per share history for free.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.