We Think HBL Power Systems (NSE:HBLPOWER) Can Manage Its Debt With Ease

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. 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?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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 Net Debt?

You can click the graphic below for the historical numbers, but it shows that HBL Power Systems had ₹694.1m of debt in March 2021, down from ₹1.13b, one year before. But on the other hand it also has ₹756.9m in cash, leading to a ₹62.8m net cash position.

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 ₹2.20b due within 12 months and liabilities of ₹343.6m due beyond that. Offsetting this, it had ₹756.9m in cash and ₹2.54b in receivables that were due within 12 months. So it actually has ₹751.9m 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!

Pleasingly, HBL Power Systems is growing its EBIT faster than former Australian PM Bob Hawke downs a yard glass, boasting a 163% gain in the last twelve months. There's no doubt that we learn most about debt from the balance sheet. But it is HBL Power Systems's earnings that will influence how the balance sheet holds up in the future. 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. While HBL Power Systems has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, HBL Power Systems actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

While it is always sensible to investigate a company's debt, in this case HBL Power Systems has ₹62.8m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of ₹824m, being 328% of its EBIT. So we don't think HBL Power Systems's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. We've identified 3 warning signs with HBL Power Systems (at least 1 which shouldn't be ignored) , and understanding them should be part of your investment process.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.
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