CG Power and Industrial Solutions (NSE:CGPOWER) Has A Rock Solid Balance Sheet

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.' 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, CG Power and Industrial Solutions Limited (NSE:CGPOWER) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for CG Power and Industrial Solutions

What Is CG Power and Industrial Solutions's Net Debt?

The image below, which you can click on for greater detail, shows that CG Power and Industrial Solutions had debt of ₹165.5m at the end of March 2023, a reduction from ₹3.67b over a year. But it also has ₹7.64b in cash to offset that, meaning it has ₹7.48b net cash.

How Healthy Is CG Power and Industrial Solutions' Balance Sheet?

According to the last reported balance sheet, CG Power and Industrial Solutions had liabilities of ₹27.8b due within 12 months, and liabilities of ₹583.6m due beyond 12 months. Offsetting these obligations, it had cash of ₹7.64b as well as receivables valued at ₹16.1b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹4.67b.

Having regard to CG Power and Industrial Solutions' size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the ₹613.0b company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, CG Power and Industrial Solutions boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that CG Power and Industrial Solutions has boosted its EBIT by 49%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if CG Power and Industrial Solutions can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. CG Power and Industrial Solutions 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. During the last three years, CG Power and Industrial Solutions produced sturdy free cash flow equating to 62% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

We could understand if investors are concerned about CG Power and Industrial Solutions's liabilities, but we can be reassured by the fact it has has net cash of ₹7.48b. And we liked the look of last year's 49% year-on-year EBIT growth. So is CG Power and Industrial Solutions'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 1 warning sign for CG Power and Industrial Solutions you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.