Here's Why Sterling and Wilson Renewable Energy (NSE:SWSOLAR) Can Manage Its Debt Responsibly

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.' 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. Importantly, Sterling and Wilson Renewable Energy Limited (NSE:SWSOLAR) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. 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.

Check out our latest analysis for Sterling and Wilson Renewable Energy

What Is Sterling and Wilson Renewable Energy's Debt?

You can click the graphic below for the historical numbers, but it shows that Sterling and Wilson Renewable Energy had ₹5.16b of debt in March 2024, down from ₹20.3b, one year before. However, it does have ₹3.39b in cash offsetting this, leading to net debt of about ₹1.76b.

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

The latest balance sheet data shows that Sterling and Wilson Renewable Energy had liabilities of ₹30.5b due within a year, and liabilities of ₹3.00b falling due after that. On the other hand, it had cash of ₹3.39b and ₹32.5b worth of receivables due within a year. So it actually has ₹2.39b more liquid assets than total liabilities.

This state of affairs indicates that Sterling and Wilson Renewable 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 ₹169.0b company is short on cash, but still worth keeping an eye on the balance sheet. Carrying virtually no net debt, Sterling and Wilson Renewable Energy has a very light debt load indeed.

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

While Sterling and Wilson Renewable Energy's debt to EBITDA ratio (4.3) suggests that it uses some debt, its interest cover is very weak, at 0.13, suggesting high leverage. So shareholders should probably be aware that interest expenses appear to have really impacted the business lately. However, the silver lining was that Sterling and Wilson Renewable Energy achieved a positive EBIT of ₹221m in the last twelve months, an improvement on the prior year's loss. The balance sheet is clearly the area to focus on when you are analysing debt. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. So it's worth checking how much of the earnings before interest and tax (EBIT) is backed by free cash flow. Over the last year, Sterling and Wilson Renewable Energy actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Our View

Based on what we've seen Sterling and Wilson Renewable Energy is not finding it easy, given its interest cover, but the other factors we considered give us cause to be optimistic. In particular, we are dazzled with its conversion of EBIT to free cash flow. When we consider all the elements mentioned above, it seems to us that Sterling and Wilson Renewable Energy is managing its debt quite well. Having said that, the load is sufficiently heavy that we would recommend any shareholders keep a close eye on it. There's no doubt that we learn most about debt from the balance sheet. 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.

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.