Havells India (NSE:HAVELLS) Seems To Use Debt Rather Sparingly

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. Importantly, Havells India Limited (NSE:HAVELLS) does carry 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. If things get really bad, the lenders can take control of the business. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out 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 ₹5.77b at the end of September 2021, a reduction from ₹11.0b over a year. However, its balance sheet shows it holds ₹25.6b in cash, so it actually has ₹19.9b net cash.

A Look At Havells India's Liabilities

The latest balance sheet data shows that Havells India had liabilities of ₹32.0b due within a year, and liabilities of ₹8.41b falling due after that. Offsetting these obligations, it had cash of ₹25.6b as well as receivables valued at ₹5.57b due within 12 months. So its liabilities total ₹9.23b 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 while it's hard to imagine that the ₹755.6b 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.

In addition to that, we're happy to report that Havells India has boosted its EBIT by 40%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. 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. Havells India 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. Over the most recent three years, Havells India recorded free cash flow worth 53% 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 ₹19.9b. And we liked the look of last year's 40% year-on-year EBIT growth. So is Havells India's debt a risk? It doesn't seem so to us. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Havells India you should know about.

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.