Here's Why Bharat Heavy Electricals (NSE:BHEL) Has A Meaningful Debt Burden

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Bharat Heavy Electricals Limited (NSE:BHEL) does use debt in its business. But is this debt a concern to shareholders?

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. If things get really bad, the lenders can take control of the business. 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Bharat Heavy Electricals

What Is Bharat Heavy Electricals's Net Debt?

The image below, which you can click on for greater detail, shows that at March 2023 Bharat Heavy Electricals had debt of ₹53.9b, up from ₹47.5b in one year. But it also has ₹66.4b in cash to offset that, meaning it has ₹12.6b net cash.

How Healthy Is Bharat Heavy Electricals' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Bharat Heavy Electricals had liabilities of ₹233.5b due within 12 months and liabilities of ₹91.9b due beyond that. On the other hand, it had cash of ₹66.4b and ₹31.3b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹227.7b.

This is a mountain of leverage relative to its market capitalization of ₹304.2b. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. Despite its noteworthy liabilities, Bharat Heavy Electricals boasts net cash, so it's fair to say it does not have a heavy debt load!

We note that Bharat Heavy Electricals grew its EBIT by 30% in the last year, and that should make it easier to pay down debt, going forward. 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're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Bharat Heavy Electricals may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last two years, Bharat Heavy Electricals saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While Bharat Heavy Electricals does have more liabilities than liquid assets, it also has net cash of ₹12.6b. And it impressed us with its EBIT growth of 30% over the last year. So while Bharat Heavy Electricals does not have a great balance sheet, it's certainly not too bad. 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. Be aware that Bharat Heavy Electricals is showing 1 warning sign in our investment analysis , 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.