Bharat Bijlee (NSE:BBL) Has A Rock Solid Balance Sheet

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Bharat Bijlee Limited (NSE:BBL) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Bharat Bijlee

How Much Debt Does Bharat Bijlee Carry?

You can click the graphic below for the historical numbers, but it shows that Bharat Bijlee had ₹1.58b of debt in March 2024, down from ₹2.95b, one year before. However, it does have ₹2.03b in cash offsetting this, leading to net cash of ₹445.1m.

How Strong Is Bharat Bijlee's Balance Sheet?

We can see from the most recent balance sheet that Bharat Bijlee had liabilities of ₹5.21b falling due within a year, and liabilities of ₹1.19b due beyond that. Offsetting these obligations, it had cash of ₹2.03b as well as receivables valued at ₹3.79b due within 12 months. So it has liabilities totalling ₹573.8m more than its cash and near-term receivables, combined.

Having regard to Bharat Bijlee's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the ₹51.5b company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, Bharat Bijlee also has more cash than debt, so we're pretty confident it can manage its debt safely.

In addition to that, we're happy to report that Bharat Bijlee has boosted its EBIT by 33%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Bharat Bijlee's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Bharat Bijlee has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, Bharat Bijlee generated free cash flow amounting to a very robust 92% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing Up

We could understand if investors are concerned about Bharat Bijlee's liabilities, but we can be reassured by the fact it has has net cash of ₹445.1m. The cherry on top was that in converted 92% of that EBIT to free cash flow, bringing in ₹2.1b. So is Bharat Bijlee's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 2 warning signs for Bharat Bijlee you should be aware of, and 1 of them is concerning.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com