Does Sterling and Wilson Renewable Energy (NSE:SWSOLAR) Have A Healthy Balance Sheet?

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 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. Importantly, Sterling and Wilson Renewable Energy Limited (NSE:SWSOLAR) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. 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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Sterling and Wilson Renewable Energy

What Is Sterling and Wilson Renewable Energy's Net Debt?

The image below, which you can click on for greater detail, shows that Sterling and Wilson Renewable Energy had debt of ₹4.77b at the end of March 2024, a reduction from ₹20.1b over a year. However, because it has a cash reserve of ₹3.39b, its net debt is less, at about ₹1.37b.

How Healthy Is Sterling and Wilson Renewable Energy's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Sterling and Wilson Renewable Energy had liabilities of ₹30.5b due within 12 months and liabilities of ₹3.00b due beyond that. On the other hand, it had cash of ₹3.39b and ₹8.34b worth of receivables due within a year. So it has liabilities totalling ₹21.7b more than its cash and near-term receivables, combined.

Of course, Sterling and Wilson Renewable Energy has a market capitalization of ₹183.4b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Carrying virtually no net debt, Sterling and Wilson Renewable Energy has a very light debt load indeed. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Sterling and Wilson Renewable Energy can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Sterling and Wilson Renewable Energy wasn't profitable at an EBIT level, but managed to grow its revenue by 51%, to ₹30b. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

Even though Sterling and Wilson Renewable Energy managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. To be specific the EBIT loss came in at ₹392m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. We would feel better if it turned its trailing twelve month loss of ₹2.1b into a profit. So to be blunt we do think it is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 2 warning signs with Sterling and Wilson Renewable Energy , 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. 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.