HBL Power Systems (NSE:HBLPOWER) Seems To Use Debt Quite Sensibly

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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that HBL Power Systems Limited (NSE:HBLPOWER) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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 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. 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?

As you can see below, at the end of March 2023, HBL Power Systems had ₹776.5m of debt, up from ₹501.6m a year ago. Click the image for more detail. However, its balance sheet shows it holds ₹1.46b in cash, so it actually has ₹683.4m net cash.

A Look At HBL Power Systems' Liabilities

Zooming in on the latest balance sheet data, we can see that HBL Power Systems had liabilities of ₹2.86b due within 12 months and liabilities of ₹569.2m due beyond that. Offsetting these obligations, it had cash of ₹1.46b as well as receivables valued at ₹3.15b due within 12 months. So it can boast ₹1.18b more liquid assets than total liabilities.

This surplus suggests that HBL Power Systems has a conservative balance sheet, and could probably eliminate its debt without much difficulty. 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.

Also good is that HBL Power Systems grew its EBIT at 12% over the last year, further increasing its ability to manage debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is HBL Power Systems's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

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. During the last three years, HBL Power Systems produced sturdy free cash flow equating to 54% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that HBL Power Systems has net cash of ₹683.4m, as well as more liquid assets than liabilities. On top of that, it increased its EBIT by 12% in the last twelve months. So is HBL Power Systems's debt a risk? It doesn't seem so to us. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of HBL Power Systems's earnings per share history for free.

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.