Actively investing in companies that carry no debt can be gainful for investors as such companies are usually backed by strong fundamentals and carry low risk.
Debt-free companies are often lucrative options to invest in. This is because these companies are not saddled with higher financing expenses when the interest rates are raised, thus keeping a lid on their overall costing. But what are debt-free companies, and which debt-free stocks can you invest in? Let’s find out.
What Are Debt-Free Companies?
A company usually finances its operations by either raising equity or by issuing debt. So, when a company decides not to hold any outstanding loans on its balance sheet, then such a company is considered to be debt-free. Debt-free companies have more control over their finances and are generally self-reliant.
This does not mean that such companies have never borrowed throughout their lifetime. Instead, it only indicates that the company has no debt burden. A company will be considered debt-free once the loans taken have been repaid in full.
List of Top Indian Large Cap Stocks With No Debt
The following are some of the top companies with zero debt, ranked based on their 5 year CAGR of stock price and all data as of December 5, 2023:
| Name of the company | 5 Year CAGR | P/E Ratio | Market Cap (in ₹ crore) |
| BSE | 66% | 48.17 | 34,005 |
| CDSL | 53% | 62.91 | 20,141 |
| HAL | 45% | 27.91 | 1,68,491 |
| BEL | 41% | 33.78 | 1,12,241 |
| Bharat Dynamics Ltd | 35% | 53.15 | 22,610 |
List of Top Indian Mid Cap Stocks With No Debt
The following are some of the top mid cap companies with zero debt, ranked based on their 5 year CAGR of stock price and all data as of December 5, 2023:
| Name of the company | 5 Year CAGR | P/E Ratio | Market Cap (in ₹ crore) |
| Zen Technologies Ltd | 65% | 70.16 | 6,453 |
| Saregama India Ltd | 48% | 38.20 | 7,174 |
| Ingersoll-Rand Ltd | 40% | 43.08 | 9,412 |
| Voltamp Transformers Ltd | 39% | 24.62 | 6,068 |
| GMDC Ltd | 38% | 13.49 | 13,666 |
List of Top Indian Small Cap Companies With No Debt
The following are some of the top small cap companies with zero debt, ranked based on their 5 year CAGR of stock price and all data as of December 5, 2023:
| Name of the company | 5 Year CAGR | P/E Ratio | Market Cap (in ₹ crore) |
| Integrated Industries Ltd | 196.84 | 233.46 | 318 |
| Hazoor Multi Projects Ltd | 183.94 | 5.24 | 338 |
| Eyantra Ventures Ltd | 163.05 | 139.29 | 71 |
| Swadeshi Polytex Ltd | 152.88 | 8.16 | 466 |
| Gujarat Toolroom Ltd | 144.61 | 64.15 | 292 |
How To Find Debt-Free Companies?
In order to check if a company is debt-free or not, simply check the company’s debt-to-equity ratio. If the ratio is zero, then that means that the company has virtually zero debt. If the company has a debt-to-equity ratio of less than 1, that means debt financing is overall lower than equity financing. However, when the debt-to-equity ratio becomes higher than 1, that means the company has preferred to raise more capital from debt than from equity.
What Are the Advantages of Being Debt-Free?
- No debt translates to no interest burden, thereby insulating debt-free companies from the vagaries of the interest rate regimes.
- Additionally, since a company has been running its operations without debt, the company likely has strong fundamentals and a stable financial position. Such debt-free companies also tend to have higher dividend yields and offer better returns.
- Furthermore, a zero-debt company represents a lower risk to investors since there are no creditors to lay claims over the company’s assets. It also provides debt-free companies with the bandwidth to borrow in case of any emergencies.
Disadvantages of Debt-Free Companies
While a debt-free approach offers stability, it can also come with financial drawbacks:
- Opting for equity financing, where capital is raised by selling ownership stakes, can translate to higher tax bills compared to debt-based options.
- Furthermore, prioritising equity funding over debt might lead to a diluted Earnings Per Share (EPS) ratio, potentially impacting investor sentiment regarding the company’s profitability.
Factors To Check Before Investing in Debt-Free Companies
- Growth expectations: Stocks with promising industry outlooks and consistent past growth in sales, earnings, and cash flow should be preferred. A strong track record suggests a competitive edge in future expansion of revenues and stock prices.
- Check the valuation: Compare the stock’s valuation metrics, such as P/E ratio, P/B ratio and P/S ratio, to peers and industry averages. However, just because the value is low may not mean that the stock is undervalued.
- Check the quality of the management: Research the leadership team and check if they have experience, expertise, and a clear vision. A competent crew can propel the company forward, while a weak one can spell disaster.
Conclusion
While debt-free companies reflect strong fundamentals and more headroom to invest in growth opportunities, being debt-free should not be the only criteria for you to base your investment decisions on. You will be well served to invest in companies that grow by managing their debts better than in companies with no debt but limited growth potential.
Disclaimer: This blog is exclusively for educational purposes. The securities quoted are exemplary and are not recommendatory.
