When you look at the financials of a company, different factors play different roles in helping you understand its strength. The debt section is an important field. If a company has zero debt on its balance sheet, then it is known as a debt-free company. Debt plays an important role in the present performance and future growth of any company.
In the current economic situation, where most companies are struggling due to the lockdown, companies with zero interest burden stand a better chance at surviving than those with high debts. Here is a look at the top debt free companies in India in 2020 (by market capitalization).
Note: This list is based only on published financial data and is not a recommendation. Please conduct due diligence before picking a company to invest in.
With more than 44 brands across 14 distinct categories, Hindustan Unilever is one of the country’s fastest-growing FMCG companies. It has been in India for over 80 years and growing at a steady pace. According to the company’s latest annual report, nine out of every ten households in the country use one or more of its brands.
HDFC Life Insurance was established in 2000 and is one of India’s leading life insurers today. It has a diverse distribution network across the country with 421 branches and access to more customer touch-points via partnerships with around 230 banks, NBFCs, etc. and over 40 new ecosystem partners.
Established in 2000, SBI Life Insurance is another leading life insurance company that makes it to the top-ten. It is one of the leading insurance companies in terms of individual rated premium. With a network of over 908 offices and tie-ups with multiple corporate agents, brokers, and partners, SBI Life Insurance is a strong player in the life insurance industry.
ICICI Prudential Life Insurance commenced operations in 2001 and is India’s first private insurer to cross the R.1 trillion mark in Assets under Management (AuM). With a diversified product portfolio, robust multi-channel distribution network, and wide geographical presence, the company is one of the preferred names in life insurance across the country.
HDFC AMC was established in 2000 and has evolved into a preferred choice for individual investors. With mutual fund schemes having weathered various economic storms over the last two decades, HDFC AMC has consistently maintained its position as one of India’s leading asset management companies. With over 70,000 distribution partners, its presence across the country is one of the major drivers of its growth.
In April 2007, Bajaj Auto Ltd. was de-merged into three entities – Bajaj Auto Ltd., Bajaj Finserv Ltd., and Bajaj Holdings & Investment Ltd. (BHIL). Over the last 13 years, the demerger resulted in a huge boost in the market capitalization of all three entities. BHIL is a Non-Banking Financial Company (NBFC).
SKF started its operations in India in 1923 and is currently the leader in providing industrial and automotive solutions through units and bearings, mechatronics, seals, lubrication solutions, and services. From a ball bearing manufacturing company, it has evolved into a knowledge-driven engineering company today.
Since its inception in 1975, Maharashtra Scooter Limited had been operating in the geared scooter segment for a long time. Over the period, it developed capabilities and skills to manufacture pressure die casting dies, fixtures, die casting components, etc. for two and three-wheelers. As the demand for geared scooters diminished, the company stopped manufacturing them in 2006 and moved to manufacture pressure die casting dies, fixtures and die casting components, etc.
CDSL or Central Depository Services (India) Limited is a securities depository in India. It facilitates holding securities in the dematerialized form and enables securities transactions. It is currently the largest depository in the country with over two crore active Demat accounts.
Founded in 1962, Lakshmi Machine Works Limited is India’s leading textile machinery manufacturer. It is also one of the three in the world to manufacture the entire range of spinning machinery. It caters to the domestic markets as well as exports to countries in Asia and Oceanic regions. It also makes precision castings for industries around the globe and components for the Aerospace industry.
Many investors think that if a company is debt-free, then it should be a fundamentally strong company. However, that is not always the case. If you look at the list of debt-free companies and analyze their financials thoroughly, you will be in a better position to determine the viability of investing in its stock. Here is a quick look at the pros and cons of investing in a debt-free company:
|Debt-free companies are less likely to go bankrupt since they have strong financials||If the company seeks financing via equity, then they have a lower Earning Per Share (EPS) ratio|
|Since there is no debt, there is no interest payment requirement||Companies opting for equity financing over debt pay higher taxes|
|These companies are better equipped to handle economic slowdowns since their fixed outgo is lower||Companies with zero debt tend to have a higher cost of financing|
|Such companies tend to book a higher profit margin|
|Since interest cost is a fixed cost, debt-free companies tend to have a lower break-even point|
Usually, a company with low debt that it can service comfortably is considered to be a good company. This is because it can avail tax benefits and use the funds to improve its performance and growth.
While analyzing a company to select a stock for investing, it is important to remember that just because a company is debt-free, it should not become the obvious choice. If you look at the list of top debt-free companies in the article above, you will observe that not all of them are in high demand.
Remember, debt is an important part of a business since it allows it to leverage market opportunities and boost growth. The key lies in finding companies with the optimum balance between debt and growth as opposed to finding debt-free listed companies. If a company has the ability to manage its debts efficiently and uses it for growth, then such companies are better investment avenues than those with zero debt but restricted growth. Choose wisely.