These 4 Measures Indicate That Suzlon Energy (NSE:SUZLON) Is Using Debt Safely

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Suzlon Energy Limited (NSE:SUZLON) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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.

Check out our latest analysis for Suzlon Energy

What Is Suzlon Energy's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Suzlon Energy had ₹2.32b of debt, an increase on ₹1.21b, over one year. However, it does have ₹7.78b in cash offsetting this, leading to net cash of ₹5.46b.

How Strong Is Suzlon Energy's Balance Sheet?

The latest balance sheet data shows that Suzlon Energy had liabilities of ₹40.8b due within a year, and liabilities of ₹8.79b falling due after that. Offsetting this, it had ₹7.78b in cash and ₹21.5b in receivables that were due within 12 months. So it has liabilities totalling ₹20.3b more than its cash and near-term receivables, combined.

Given Suzlon Energy has a market capitalization of ₹803.1b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Suzlon Energy also has more cash than debt, so we're pretty confident it can manage its debt safely.

On top of that, Suzlon Energy grew its EBIT by 71% over the last twelve months, and that growth will make it easier to handle 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. While Suzlon Energy 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 most recent three years, Suzlon Energy recorded free cash flow worth 55% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Suzlon Energy has ₹5.46b in net cash. And we liked the look of last year's 71% year-on-year EBIT growth. So is Suzlon Energy's debt a risk? It doesn't seem so to us. Over time, share prices tend to follow earnings per share, so if you're interested in Suzlon Energy, you may well want to click here to check an interactive graph of its earnings per share history.

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.