Health Check: How Prudently Does Bharat Heavy Electricals (NSE:BHEL) Use Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Bharat Heavy Electricals Limited (NSE:BHEL) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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 step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Bharat Heavy Electricals

What Is Bharat Heavy Electricals's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2023 Bharat Heavy Electricals had ₹54.5b of debt, an increase on ₹48.3b, over one year. But it also has ₹64.1b in cash to offset that, meaning it has ₹9.59b net cash.

A Look At Bharat Heavy Electricals' Liabilities

We can see from the most recent balance sheet that Bharat Heavy Electricals had liabilities of ₹233.5b falling due within a year, and liabilities of ₹91.9b due beyond that. On the other hand, it had cash of ₹64.1b and ₹158.1b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹103.2b.

This deficit isn't so bad because Bharat Heavy Electricals is worth ₹432.6b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. Despite its noteworthy liabilities, Bharat Heavy Electricals boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Bharat Heavy Electricals's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Bharat Heavy Electricals wasn't profitable at an EBIT level, but managed to grow its revenue by 3.1%, to ₹237b. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is Bharat Heavy Electricals?

While Bharat Heavy Electricals lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of ₹3.2b. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. Until we see some positive EBIT, we're a bit cautious of the stock, not least because of the rather modest revenue growth. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Bharat Heavy Electricals you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.