Havells India (NSE:HAVELLS) Could Easily Take On More 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. Importantly, Havells India Limited (NSE:HAVELLS) does carry debt. But the more important question is: how much risk is that debt creating?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.

View our latest analysis for Havells India

What Is Havells India's Net Debt?

The image below, which you can click on for greater detail, shows that Havells India had debt of ₹3.96b at the end of March 2022, a reduction from ₹4.92b over a year. But it also has ₹27.0b in cash to offset that, meaning it has ₹23.1b net cash.

How Healthy Is Havells India's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Havells India had liabilities of ₹36.3b due within 12 months and liabilities of ₹8.87b due beyond that. On the other hand, it had cash of ₹27.0b and ₹7.93b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹10.3b.

This state of affairs indicates that Havells India's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the ₹746.0b company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, Havells India also has more cash than debt, so we're pretty confident it can manage its debt safely.

Also positive, Havells India grew its EBIT by 25% 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 ultimately the future profitability of the business will decide if Havells India can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Havells India has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, Havells India 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 Havells India's liabilities, but we can be reassured by the fact it has has net cash of ₹23.1b. And it impressed us with its EBIT growth of 25% over the last year. So we don't think Havells India's use of debt is risky. 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. For example, we've discovered 1 warning sign for Havells India that you should be aware of before investing here.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.