Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Havells India Limited (NSE:HAVELLS) makes use of debt. But is this debt a concern to shareholders?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.
How Much Debt Does Havells India Carry?
The image below, which you can click on for greater detail, shows that at March 2021 Havells India had debt of ₹4.92b, up from ₹1.62b in one year. But on the other hand it also has ₹19.6b in cash, leading to a ₹14.6b net cash position.
How Strong Is Havells India's Balance Sheet?
According to the last reported balance sheet, Havells India had liabilities of ₹27.8b due within 12 months, and liabilities of ₹8.99b due beyond 12 months. Offsetting these obligations, it had cash of ₹19.6b as well as receivables valued at ₹6.49b due within 12 months. So its liabilities total ₹10.7b more than the combination of its cash and short-term receivables.
Having regard to Havells India's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the ₹716.3b company is short on cash, but still worth keeping an eye on the 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.
Even more impressive was the fact that Havells India grew its EBIT by 136% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Havells India's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs 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. In the last three years, Havells India's free cash flow amounted to 32% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.
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 ₹14.6b. And it impressed us with its EBIT growth of 136% 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. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Havells India is showing 1 warning sign in our investment analysis , you should know about...
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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