How to find Debt free Companies in India?
Debt is an important factor to consider before investing in any company. Zero debt indicates good financial health. On the other hand, heavy debt shows that the company might be having some big trouble in the future and it is not advisable to invest in such a company. Additionally, a low debt company has the advantage of earning a higher profit margin and has higher solvency. But high debt companies have to pay off high interest so they have decreasing profits.
What are some types of debt?
There are two main types of debt that companies can have on their balance sheet. Those are:
Short-term debt – It contains current liability.
Long-term debt – It contains non-current liability
Why do companies avail debt?
Companies usually resort to short-term debt to manage the immediate cash flow needs. This type of debt makes the company more liquid and working capital is enhanced. On the other hand, long-term debt is availed for the purpose of Capital Expenditure.
Is debt good or bad for any company?
If there is a possibility of being completely debt-free then an individual should choose that. But for company debt is not bad. Debt acts as leverage and helps the company to increase its EPS over time. The higher EPS will in turn result in higher shareholders' returns.
Other benefits of higher EPS are:
Share price rises
DPS may also rise
Individuals and investors should also be touchy about the debt. Appetite for debt is known as financial leverage. If the company is utilizing debt should look at how much profits it makes using the debt.
What is the Debt-to-Equity Ratio?
The debt-to-equity ratio measures the relationship between debt (that is the amount of capital that has been borrowed by the company) and Equity (that is the amount of capital contributed by the shareholders of the company). As the name of the ratio suggests, it includes debt in the numerator divided by the equity in the denominator. As the firm’s debt-to-equity ratio increases, there is more risk added to the company. Companies that have no debt means they have enough means to look after equity, reserves, and surplus in a smooth manner. There is no pressure of liabilities on such firms as debt is a huge part of added risk and if that is eliminated the risk is reduced. A low debt-to-equity company has a stronger equity position.
Importance of Debt-Equity Ratio
The debt-to-equity ratio indicated the risk associated with the financial structure and management of the company. The liabilities that are to be repaid over a period are known as debt. This ratio gives a great picture of the company’s success potential and capital structure. Many business executives who understand this ratio may use it for the competition of their company in the market. If this ratio is high meaning the company is less likely to be able to repay the liabilities, so even a bank won't offer additional funding to such a company. A low debt-to-equity ratio suggests a company that is more reliant on its equity than debt.
Advantages of Debt free Firms
Debt-free businesses are not affected by a slow economy or increase in interest rate. Such companies can work smoothly even when the economy is slowing down. There are low-risk investment opportunities available for its investors. Additionally, such a firm can provide higher returns. Debt has a long-term cost and it is a short-term fix in any financial crisis. A higher dividend is paid out by the debt-free company and higher returns are received by the investors.
How to find Debt Free Companies?
Here are few simple steps to find debt-free companies:
Visit the website of Screener you think is best suitable for you
Register with that website or log in with proper credentials
Find a query builder
Now choose the type of equity debt = 0
Click on run the query
Now on your screen, there will be a list of all debt-free companies that are available in India.
In addition to that, you can add more variables to that query and make it more personalized and customized. For example, suppose you want to locate a company that has zero debt and a market value greater than 1,00,000 crores. Then you need to use the query builder and create the following query:
Debt to Equity = 0
Market Capitalisation > 1,00,000
This query generator which is mentioned above can also be used to filter companies according to financial ratios like PEG, ROE, PE, etc. You can screen the Various stocks on Stock Screener by using Ticker by Finology.
What are some Disadvantages of Debt Free companies?
There are many advantages of investing in a debt-free company but there are some disadvantages too.
When a firm chooses stock financing rather than debt, there is a higher tax levied.
Equity financing means raising capital via the sale of shares. If equity financing is chosen over debt financing the EPS ratio will be relatively low.
Ignoring debt financing, makes the company lose the tax shield which would have been received in of debt financing.
Debt-free companies are regarded as less proactive companies by the investors.
Best Debt-Free Company Stocks that are great for investment in India 2021
Conclusion
To sum it up, Debt is an important factor to consider before investing in any company. Zero debt indicates good financial health. On the other hand, heavy debt shows that the company might be having some big trouble in the future and it is not advisable to invest in such a company. Individuals and investors should also be touchy about the debt. Appetite for debt is known as financial leverage. If the company is utilizing debt should look at how much profits it makes using the debt.
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