Does HBL Power Systems (NSE:HBLPOWER) Have A Healthy Balance Sheet?

Warren Buffett famously said, '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. Importantly, HBL Power Systems Limited (NSE:HBLPOWER) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for HBL Power Systems

What Is HBL Power Systems's Debt?

You can click the graphic below for the historical numbers, but it shows that HBL Power Systems had ₹932.1m of debt in September 2020, down from ₹1.12b, one year before. However, its balance sheet shows it holds ₹1.29b in cash, so it actually has ₹355.6m net cash.

A Look At HBL Power Systems' Liabilities

According to the last reported balance sheet, HBL Power Systems had liabilities of ₹2.69b due within 12 months, and liabilities of ₹224.4m due beyond 12 months. Offsetting these obligations, it had cash of ₹1.29b as well as receivables valued at ₹2.29b due within 12 months. So it actually has ₹660.0m more liquid assets than total liabilities.

This short term liquidity is a sign that HBL Power Systems could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that HBL Power Systems has more cash than debt is arguably a good indication that it can manage its debt safely.

Shareholders should be aware that HBL Power Systems's EBIT was down 41% last year. If that earnings trend continues then paying off its debt will be about as easy as herding cats on to a roller coaster. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since HBL Power Systems will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. HBL Power Systems 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. Happily for any shareholders, HBL Power Systems actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that HBL Power Systems has net cash of ₹355.6m, as well as more liquid assets than liabilities. The cherry on top was that in converted 370% of that EBIT to free cash flow, bringing in ₹2.1b. So we are not troubled with HBL Power Systems's debt use. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example HBL Power Systems has 4 warning signs (and 1 which is concerning) we think you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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This article by Simply Wall St is general in nature. 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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