These 4 Measures Indicate That HBL Power Systems (NSE:HBLPOWER) Is Using Debt Reasonably Well

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies HBL Power Systems Limited (NSE:HBLPOWER) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

See 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. But on the other hand it also has ₹1.29b in cash, leading to a ₹355.6m net cash position.

How Healthy Is HBL Power Systems's Balance Sheet?

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 this, it had ₹1.29b in cash and ₹2.29b in receivables that were 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. Succinctly put, HBL Power Systems boasts net cash, so it's fair to say it does not have a heavy debt load!

Importantly, HBL Power Systems's EBIT fell a jaw-dropping 50% in the last twelve months. If that decline continues then paying off debt will be harder than selling foie gras at a vegan convention. The balance sheet is clearly the area to focus on when you are analysing debt. 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 it is always sensible to investigate a company's debt, in this case HBL Power Systems has ₹355.6m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 354% 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. However, not all investment risk resides within the balance sheet - far from it. Consider for instance, the ever-present spectre of investment risk. We've identified 4 warning signs with HBL Power Systems (at least 1 which is potentially serious) , and understanding them should be part of your investment process.

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. 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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