We Think Havells India (NSE:HAVELLS) Can Manage Its Debt With Ease

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. As with many other companies Havells India Limited (NSE:HAVELLS) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Havells India

How Much Debt Does Havells India Carry?

As you can see below, at the end of September 2024, Havells India had ₹3.32b of debt, up from ₹2.68b a year ago. Click the image for more detail. However, it does have ₹31.9b in cash offsetting this, leading to net cash of ₹28.6b.

How Healthy Is Havells India's Balance Sheet?

The latest balance sheet data shows that Havells India had liabilities of ₹43.2b due within a year, and liabilities of ₹7.17b falling due after that. On the other hand, it had cash of ₹31.9b and ₹7.59b worth of receivables due within a year. So it has liabilities totalling ₹10.9b more than its cash and near-term receivables, combined.

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 ₹915.7b 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.

And we also note warmly that Havells India grew its EBIT by 15% last year, making its debt load easier to handle. When analysing debt levels, the balance sheet is the obvious place to start. 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.

Finally, while the tax-man may adore accounting profits, lenders only accept 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. During the last three years, Havells India produced sturdy free cash flow equating to 59% 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 ₹28.6b. And it impressed us with its EBIT growth of 15% over the last year. 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. 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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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.