CG Power and Industrial Solutions (NSE:CGPOWER) Seems To Use Debt Quite Sensibly

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. We note that CG Power and Industrial Solutions Limited (NSE:CGPOWER) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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.

See our latest analysis for CG Power and Industrial Solutions

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

As you can see below, at the end of March 2024, CG Power and Industrial Solutions had ₹175.6m of debt, up from ₹165.5m a year ago. Click the image for more detail. But on the other hand it also has ₹14.4b in cash, leading to a ₹14.2b net cash position.

A Look At CG Power and Industrial Solutions' Liabilities

We can see from the most recent balance sheet that CG Power and Industrial Solutions had liabilities of ₹25.5b falling due within a year, and liabilities of ₹588.9m due beyond that. Offsetting these obligations, it had cash of ₹14.4b as well as receivables valued at ₹17.7b due within 12 months. So it actually has ₹6.00b more liquid assets than total liabilities.

This state of affairs indicates that CG Power and Industrial Solutions' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the ₹1.16t company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, CG Power and Industrial Solutions boasts net cash, so it's fair to say it does not have a heavy debt load!

Also good is that CG Power and Industrial Solutions grew its EBIT at 12% over the last year, further increasing its ability to manage debt. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine CG Power and Industrial Solutions'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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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 53% 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

While it is always sensible to investigate a company's debt, in this case CG Power and Industrial Solutions has ₹14.2b in net cash and a decent-looking balance sheet. And it also grew its EBIT by 12% over the last year. So is CG Power and Industrial Solutions's debt a risk? It doesn't seem so to us. Over time, share prices tend to follow earnings per share, so if you're interested in CG Power and Industrial Solutions, you may well want to click here to check an interactive graph of its earnings per share history.

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.