We Think CG Power and Industrial Solutions (NSE:CGPOWER) Can Manage Its Debt With Ease

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. We can see that CG Power and Industrial Solutions Limited (NSE:CGPOWER) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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, 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 CG Power and Industrial Solutions

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

As you can see below, CG Power and Industrial Solutions had ₹169.3m of debt at September 2023, down from ₹2.42b a year prior. However, its balance sheet shows it holds ₹11.8b in cash, so it actually has ₹11.7b net cash.

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

Zooming in on the latest balance sheet data, we can see that CG Power and Industrial Solutions had liabilities of ₹27.5b due within 12 months and liabilities of ₹584.9m due beyond that. On the other hand, it had cash of ₹11.8b and ₹13.8b worth of receivables due within a year. So it has liabilities totalling ₹2.45b more than its cash and near-term receivables, combined.

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 ₹686.3b 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!

Also positive, CG Power and Industrial Solutions grew its EBIT by 26% in the last year, and that should make it easier to pay down debt, going forward. When analysing debt levels, the balance sheet is the obvious place to start. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs 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 65% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that CG Power and Industrial Solutions has ₹11.7b in net cash. And we liked the look of last year's 26% year-on-year EBIT growth. So is CG Power and Industrial Solutions's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. We've identified 1 warning sign with CG Power and Industrial Solutions , and understanding them should be part of your investment process.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.