Havells India (NSE:HAVELLS) Could Easily Take On More Debt

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 Havells India Limited (NSE:HAVELLS) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. 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.

See our latest analysis for Havells India

What Is Havells India's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Havells India had ₹3.03b of debt, an increase on ₹2.23b, over one year. However, it does have ₹30.2b in cash offsetting this, leading to net cash of ₹27.2b.

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 ₹42.8b due within 12 months and liabilities of ₹7.03b due beyond that. Offsetting these obligations, it had cash of ₹30.2b as well as receivables valued at ₹12.2b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹7.40b.

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 it's very unlikely that the ₹1.12t company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Havells India boasts net cash, so it's fair to say it does not have a heavy debt load!

Also positive, Havells India grew its EBIT by 24% in the last year, and that should make it easier to pay down debt, going forward. There's no doubt that we learn most about debt from the balance sheet. 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. Over the most recent three years, Havells India recorded free cash flow worth 62% of its EBIT, which is around normal, given free cash flow excludes interest and tax. 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 ₹27.2b. And we liked the look of last year's 24% year-on-year EBIT growth. So is Havells India's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. 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.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.

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