Is Inox Wind (NSE:INOXWIND) Using Too Much Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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 Inox Wind Limited (NSE:INOXWIND) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Inox Wind

How Much Debt Does Inox Wind Carry?

The image below, which you can click on for greater detail, shows that at March 2023 Inox Wind had debt of ₹23.7b, up from ₹17.2b in one year. On the flip side, it has ₹2.72b in cash leading to net debt of about ₹21.0b.

How Healthy Is Inox Wind's Balance Sheet?

The latest balance sheet data shows that Inox Wind had liabilities of ₹28.4b due within a year, and liabilities of ₹9.81b falling due after that. Offsetting these obligations, it had cash of ₹2.72b as well as receivables valued at ₹8.61b due within 12 months. So its liabilities total ₹26.9b more than the combination of its cash and short-term receivables.

This is a mountain of leverage relative to its market capitalization of ₹43.7b. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Inox Wind'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.

In the last year Inox Wind wasn't profitable at an EBIT level, but managed to grow its revenue by 20%, to ₹7.5b. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Even though Inox Wind managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. Indeed, it lost ₹3.6b at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through ₹15b of cash over the last year. So suffice it to say we consider the stock very risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 3 warning signs we've spotted with Inox Wind (including 2 which are significant) .

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.