These 4 Measures Indicate That Cummins (NYSE:CMI) Is Using Debt Reasonably Well

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that ‘Volatility is far from synonymous with risk.’ So it seems the smart money knows that debt – which is usually involved in bankruptcies – is a very important factor, when you assess how risky a company is. As with many other companies Cummins Inc. (NYSE:CMI) makes use of debt. But should shareholders be worried about its use of debt?

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Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

As you can see below, Cummins had US$7.54b of debt, at September 2025, which is about the same as the year before. You can click the chart for greater detail. However, it also had US$3.16b in cash, and so its net debt is US$4.38b.

We can see from the most recent balance sheet that Cummins had liabilities of US$9.45b falling due within a year, and liabilities of US$11.1b due beyond that. Offsetting these obligations, it had cash of US$3.16b as well as receivables valued at US$5.64b due within 12 months. So it has liabilities totalling US$11.7b more than its cash and near-term receivables, combined.

Given Cummins has a humongous market capitalization of US$65.2b, it’s hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time.

View our latest analysis for Cummins

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Cummins’s net debt is only 0.84 times its EBITDA. And its EBIT easily covers its interest expense, being 17.5 times the size. So you could argue it is no more threatened by its debt than an elephant is by a mouse. And we also note warmly that Cummins grew its EBIT by 17% last year, making its debt load easier to handle. There’s no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Cummins’s ability to maintain a healthy balance sheet going forward. So if you’re focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So it’s worth checking how much of that EBIT is backed by free cash flow. In the last three years, Cummins’s free cash flow amounted to 43% of its EBIT, less than we’d expect. That weak cash conversion makes it more difficult to handle indebtedness.

The good news is that Cummins’s demonstrated ability to cover its interest expense with its EBIT delights us like a fluffy puppy does a toddler. And the good news does not stop there, as its net debt to EBITDA also supports that impression! Taking all this data into account, it seems to us that Cummins takes a pretty sensible approach to debt. While that brings some risk, it can also enhance returns for shareholders. Over time, share prices tend to follow earnings per share, so if you’re interested in Cummins, you may well want to click here to check an interactive graph of its earnings per share history.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.