When it comes to investing in stocks, there are several parameters that one needs to pay attention to. These include the stock’s price-to-earnings ratio (PE), its historical returns over different time frames, the company’s financial health, and more. However, one crucial parameter that often goes unnoticed by many investors is the company’s level of debt or borrowings.
Read More – What is Fundamental Analysis in Stock Market?
In this blog, we will delve into the concept of debt-free stocks and explore top 3 small-cap debt-free stocks in 2023 that are fundamentally strong.
What are debt-free stocks
Debt-free stocks are those companies that do not have any outstanding borrowings. Such companies are often considered financially stable and less vulnerable, especially during challenging economic times.
Why do companies have debt?
Debt, in simple terms, refers to borrowing money. Many companies rely on debt to fund their operations and growth initiatives. Just like individuals take loans to purchase homes or cars, companies borrow from banks and investors to finance their activities.
But is debt always good for a company? Well, it depends on how it is managed. Debt can be both advantageous and detrimental to a company. While debt can provide necessary funds for expansion, it also comes with obligations to repay, including interest payments.
A recent example that highlights the impact of debt on stocks is the case of the Adani group of companies, whose stock prices were affected when concerns arose about their ability to manage their debt.
Is it good to invest in debt free companies?
Investors often look for companies with zero debt for several reasons. A zero debt company is one that does not have any outstanding loans or borrowings. Such companies are financially strong and less burdened by obligations.
Zero debt companies offer benefits such as:
- Decision-Making Flexibility: These companies can make decisions without the constraints of debt repayments to lenders.
- Strong Credit Ratings: With no borrowings, these companies tend to have better credit ratings, leading to lower borrowing costs in the future.
Top 3 small-cap zero debt companies
Let’s delve into three small-cap zero debt companies that meet specific criteria.
We have used these criteria to arrive at the Top 3 small-cap debt free stocks.
| 1 | Debt to equity < 1 |
| 2 | Profit Growth > 10% |
| 3 | YoY Sales growth > 10% |
| 4 | PE <= Industry PE |
These criteria are to make sure that we consider only fundamentally strong companies.
Top small-cap zero debt companies #1 Voltamp Transformers Ltd
Established in 1963 in Vadodara, Gujarat, Voltamp Transformers Ltd has emerged as a prominent transformer manufacturer. The company specializes in crafting high-quality power solutions, including oil-filled power transformers, distribution transformers, and dry-type transformers.
Situated strategically across India, Voltamp Transformers Ltd’s manufacturing facilities, sales offices, and service centers have gained a strong presence. The company’s commitment to innovation and technology has positioned it as a reliable industry player. Its focus on delivering efficient, timely, and dependable transformer solutions has solidified its reputation within India’s power sector.
Strengths –
Diverse Client Base – With a diverse client base of over 1,000 customers, Voltamp Transformers Ltd caters to various industries, including power, oil refineries, textiles, chemicals, real estate, automobiles, infrastructure, and steel.
Financial Strength: Remarkably, Voltamp Transformers Ltd maintains a zero-debt level. Despite this, the company has achieved consistent sales and profit growth.
In terms of financial performance, the company has consistently delivered positive and increasing profits after tax over the past five years. Notably, in the fiscal year 2022-23, the company exhibited substantial growth in its Profit after Tax performance.
The robust financial performance is mirrored in the company’s stock performance, which remains solid.
Strategic investments: Apart from being debt-free, Voltamp Transformers Ltd efficiently manages its surplus funds through diversified portfolios. These include investments in debt and equity mutual funds, government securities, bonds, debentures, fixed deposits, and tax-free bonds. As of March 31, 2023, the company’s total investments amounted to Rs. 650 crores.
Challenges –
While Voltamp Transformers Ltd enjoys numerous strengths, some underutilized capacities present opportunities for expansion. The company also faces competition from domestic and international players. Furthermore, it grapples with long-term challenges such as currency fluctuations, government policies on power and infrastructure, volatile raw material prices, and the need for competitive pricing strategies.
Top small-cap zero debt companies #2 CMS Info Systems Ltd
Founded in 1976, CMS Info Systems Ltd stands as India’s largest provider of cash management and payment solutions. In 2021, the company entered the public domain through an IPO. With a focus on cash processing and transit services, CMS offers specialized solutions to banks and financial institutions. The company also extends a range of technology-driven services, including ATM management, currency management, retail and enterprise solutions, and card services.
Boasting a robust regional presence, CMS serves an extensive client base within the banking and financial sectors. The company’s recent foray into ATM manufacturing is notable. CMS inaugurated a new plant in Chennai dedicated to crafting ATM machines and other banking automation products, showcasing its expansionary approach.
Despite its ambitious endeavors, what sets CMS Info Systems apart is its zero-debt status. The company’s current performance is commendable. In the quarter ending June 2023, CMS achieved net sales of Rs 511.56 crore, marking a 12.85% increase from the Rs. 453.30 crores recorded in June 2022. The quarterly net profit also experienced a Year on Year surge of 22.12%, reaching Rs. 84.28 crores in June 2023. Additionally, the company’s net worth consistently rose, reaching Rs. 1,563 crores in FY’23.
Remarkably, despite its debt-free stance, CMS is venturing into ATM machine manufacturing. This strategic move is underpinned by the company’s robust cash flow, enabling it to invest in such endeavors. CMS’s vision is bolstered by Korean ATM major Hyosung, contributing technology solutions, including ATM modules, to the new Chennai plant.
A glimpse at the company’s stock performance over the past year offers insights into investor sentiment. With a strong financial foundation and a debt-free balance sheet, CMS Info Systems projects a positive trajectory for its future. This remarkable blend of growth, innovation, and financial prudence positions the company as a notable player in the cash management solutions landscape.
Top small-cap zero debt companies #3 Nippon Life India Asset Management Ltd
Formerly known as Reliance Nippon Life Asset Management Ltd., Nippon Life India Asset Management Ltd. has emerged as a significant player in the financial world. Established in 1995, this asset management company serves as the investment manager for Nippon India Mutual Fund, offering a diverse range of mutual fund schemes that include equity, debt, and hybrid funds.
Backed by the influential Nippon Life Insurance Company, a leading private life insurer in Japan, Nippon Life India Asset Management Ltd. boasts a robust distribution network spanning across various Indian cities and towns. This network facilitates the seamless delivery of their products and services to retail investors, institutional investors, and high net worth individuals.
Within the realm of India’s mutual fund industry, where ten major AMC players control over 80% of the Assets Under Management (AUM), Nippon stands tall with a total AUM of Rs. 2.93 lakh crore as of April 2023. Impressively, the company has achieved a debt-free status while dominating the Exchange Traded Funds (ETF) segment.
A highlight of the company’s prowess lies in its consistent profit growth over the years. This financial stability has culminated in a remarkable Q1 2023 performance, with net profits surging by a staggering 107% YoY to reach Rs. 236 crores. The company attributes this robust performance to the resilience of the capital markets.
Furthermore, Nippon Life India Asset Management Ltd. has cultivated a vast customer base of 14 million in this quarter alone. The company’s unwavering commitment to financial excellence has translated into rewarding returns for investors over the past few years.
The company’s allure as an investment option is further amplified by its zero-debt status, market leadership, steadfast financial performance, and the strong backing of a global life insurance giant. As it continues to navigate the dynamic landscape of India’s financial markets, Nippon Life India Asset Management Ltd. stands as a beacon of stability and growth, promising a brighter financial future for both itself and its investors.
Is debt risky for investors?
When companies consistently meet their debt repayment deadlines, it can give the impression that everything is running smoothly. However, beneath this facade, critical questions arise:
- Borrowed Amount: How much capital has the company actually borrowed?
- Financial Strength: Is the company relying too heavily on borrowed funds for its financial stability?
- Interest Rate Risks: Can the company manage repayments if interest rates suddenly rise?
While on-time debt payments might provide a sense of security, these inquiries delve deeper into the company’s true financial status. As astute investors, we must go beyond the surface to ask these questions, revealing insights that shape our investment decisions.
Conclusion
Debt-free companies hold a unique appeal in the world of investing. They not only signify financial stability but also offer flexibility in decision-making and enhanced credit ratings. The three small-cap companies highlighted in this blog exemplify the potential of zero debt companies to deliver strong financial performance.
However, it’s important to conduct thorough research before making any investment decisions. While these companies showcase promising traits, every investor’s goals and risk appetite differ. By focusing on debt-free companies with strong fundamentals, investors can potentially position themselves for long-term success in the stock market.
