Here's Why GE Power India (NSE:GEPIL) Can Afford Some Debt

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that GE Power India Limited (NSE:GEPIL) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

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What Is GE Power India's Debt?

The image below, which you can click on for greater detail, shows that GE Power India had debt of ₹3.53b at the end of September 2022, a reduction from ₹5.92b over a year. However, because it has a cash reserve of ₹2.05b, its net debt is less, at about ₹1.47b.

A Look At GE Power India's Liabilities

According to the last reported balance sheet, GE Power India had liabilities of ₹26.6b due within 12 months, and liabilities of ₹1.68b due beyond 12 months. On the other hand, it had cash of ₹2.05b and ₹22.5b worth of receivables due within a year. So its liabilities total ₹3.72b more than the combination of its cash and short-term receivables.

This deficit isn't so bad because GE Power India is worth ₹10.2b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. There's no doubt that we learn most about debt from the balance sheet. But it is GE Power India's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, GE Power India made a loss at the EBIT level, and saw its revenue drop to ₹23b, which is a fall of 31%. To be frank that doesn't bode well.

Caveat Emptor

While GE Power India's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost a very considerable ₹2.8b at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. We would feel better if it turned its trailing twelve month loss of ₹3.8b into a profit. So in short it's a really risky stock. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 1 warning sign we've spotted with GE Power India .

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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