Here's Why Bharat Heavy Electricals (NSE:BHEL) Can Afford Some Debt

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.' 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. We note that Bharat Heavy Electricals Limited (NSE:BHEL) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. 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?

As you can see below, at the end of September 2023, Bharat Heavy Electricals had ₹89.8b of debt, up from ₹56.8b a year ago. Click the image for more detail. However, it also had ₹55.2b in cash, and so its net debt is ₹34.6b.

How Healthy Is Bharat Heavy Electricals' Balance Sheet?

We can see from the most recent balance sheet that Bharat Heavy Electricals had liabilities of ₹256.2b falling due within a year, and liabilities of ₹92.2b due beyond that. Offsetting these obligations, it had cash of ₹55.2b as well as receivables valued at ₹38.7b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹254.5b.

While this might seem like a lot, it is not so bad since Bharat Heavy Electricals has a market capitalization of ₹706.5b, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Bharat Heavy Electricals can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Bharat Heavy Electricals wasn't profitable at an EBIT level, but managed to grow its revenue by 2.4%, to ₹236b. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Over the last twelve months Bharat Heavy Electricals produced an earnings before interest and tax (EBIT) loss. Indeed, it lost ₹3.3b at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through ₹46b of cash over the last year. So suffice it to say we consider the stock very risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. 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.