Is Suzlon Energy (NSE:SUZLON) Using Too Much Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. As with many other companies Suzlon Energy Limited (NSE:SUZLON) 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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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.

Check out our latest analysis for Suzlon Energy

What Is Suzlon Energy's Debt?

As you can see below, Suzlon Energy had ₹1.10b of debt at March 2024, down from ₹19.0b a year prior. But on the other hand it also has ₹4.35b in cash, leading to a ₹3.25b net cash position.

How Strong Is Suzlon Energy's Balance Sheet?

The latest balance sheet data shows that Suzlon Energy had liabilities of ₹30.1b due within a year, and liabilities of ₹2.50b falling due after that. Offsetting these obligations, it had cash of ₹4.35b as well as receivables valued at ₹18.3b due within 12 months. So it has liabilities totalling ₹9.93b more than its cash and near-term receivables, combined.

This state of affairs indicates that Suzlon Energy's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the ₹726.4b company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Suzlon Energy boasts net cash, so it's fair to say it does not have a heavy debt load!

It is well worth noting that Suzlon Energy's EBIT shot up like bamboo after rain, gaining 46% in the last twelve months. That'll make it easier to manage its debt. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Suzlon Energy's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Suzlon Energy 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, Suzlon Energy produced sturdy free cash flow equating to 69% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

We could understand if investors are concerned about Suzlon Energy's liabilities, but we can be reassured by the fact it has has net cash of ₹3.25b. And it impressed us with its EBIT growth of 46% over the last year. So we don't think Suzlon Energy'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. Be aware that Suzlon Energy is showing 3 warning signs in our investment analysis , and 1 of those shouldn't be ignored...

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. 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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