The quest for the best debt free companies in India has just got better. Debt thus plays an important role in the growth of a business. Moreover, companies use the capital for their regular operations. They can thus source it from either their own fund or as a credit from somewhere. Also, to manage a business effectively, the company can either bring its own funds or borrow from a bank or any institution. Debt-financing is a time-constrained activity that requires repayment of borrowed money including the interest in a specified time. We discuss such investment-worthy companies and their features in this article. Let's begin!
Significance of Debt to Equity ratio
Debt to Equity ratio thus indicates the level of risk a company faces with its financial structure and practices. Moreover, it simply signifies the amount of debt a company is using in proportion to the financial leverage available to it. Also, debt is a liability on any company. It thus requires the company to pay it off and settle its balance sheet.
Furthermore, the debt to equity ratio of a company gives you an overview of its capital structure and the potential for success. Also, business executives can use it to make their companies more competitive while the investors can use it to gauge the viability of their investments.
In addition to the above, an abnormally higher D/E ratio can be a problem with the banks. This is because it will lower than bank's chances of getting back its loan. Thus, banks can deny you additional lending or set difficult conditions to borrow. For example, if the bank's limit is 1.5 and you have 2, you may be denied the loan.
Lastly, a lower debt to equity ratio is indicative of the fact that the company is using lesser debts and its equity position is good.
Debt to Equity ratio= Total liabilities/ Total Shareholder's equity
Top 10 Debt Free Companies in India
Here is thus a list of top 10 debt free companies that are worth investing in 2021,
|Company||Debt||Market Cap in Rs|
|SBI Life Insurance Company Ltd||0||34.73T Cr|
|HDFC AMC Ltd||0||66.17T Cr|
|Max Financial||0||34.77T Cr|
|Hindustan Unilever Limited (HUL)||0||5.58L Cr|
|ICICI Prudential Life Insurance||0||84.38T Cr|
|Ambuja Cements||0||67.70T Cr|
|P & G Hygiene and Health Care Ltd||0||42.45T Cr|
|Gillette India Ltd||0||18.84T Cr|
Advantages of Debt Free Companies
Here are some of the many benefits of investing in debt free companies,
1. Unaffected by Slowdowns: Debt free companies face no to minimal impact of a slowdown or a change in interest rates. Also, their business can still function in a slowdown.
2. Low Risk Investments: Both amateur and professional investors thus prefer such companies as they have low default chances.
3. Higher Returns: Moreover as there is no debt, the company generates higher dividends & returns for its investors.
4. Enhanced Working Capital: Also, the sources of cash are plenty and thus its working capital is also good.
5. Higher Profit Margin: Finance cost being low subsequently leads to a jump in profitability. Thus, investors may bet attracted to such companies based on their analysis.
Disadvantages of Debt Free Companies
Here are some disadvantages of debt free companies,
1. Low Credit Rating: The company's credit rating will go down. Hence, any lender will not lend money to it when it badly needs it or lend at difficult terms & conditions.
2.Higher Taxation: If a company thus chooses stock financing over debt, it might attract higher taxation. Moreover, equity financing happens with the sale of shares to earn capital. This can subsequently lower the EPS or earnings per share ratio. Also, the tax shield is not available to these companies.
3. Not Proactive: Investors can thus feel that the company is not using its assets properly or being skeptical to expand. Consequently, they might have second thoughts on investing in them.
How to Find Debt-Free Companies?
Here are the steps you should thus take to find debt free companies in India,
Step 1: Firstly, Go to the Screener Website.
Step 2: If you are new, register on the website or thus log in with your existing details.
Step 3: Subsequently look for Query builder.
Step 4: Now type debt to equity = 0.
Step 5: Finally, click on run the query.
Consequently, your screen will thus have a list of debt free companies in India.
Moreover, you can add different variables to this query to make it personalized.
Companies thus normally finance themselves through debt, equity, or internal financing. Moreover, internal financing is the most liked option, followed by debt. Equity is not the go-to option as it has huge costs.
Also, investors must check the growth factor of the debt free companies as well. It might also be that such companies are not investing in their future capacity and expansion, which can thus affect their productivity. The company might look appealing but there can be other factors affecting its growth. Consequently, the company might be stifling its rise by playing safe.
Lastly, to conclude, you must do a complete analysis of the company before making any decisions. Happy investing!