Is Sterling and Wilson Renewable Energy (NSE:SWSOLAR) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Sterling and Wilson Renewable Energy Limited (NSE:SWSOLAR) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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. The first step when considering a company's debt levels is to consider 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?

You can click the graphic below for the historical numbers, but it shows that as of September 2022 Sterling and Wilson Renewable Energy had ₹13.3b of debt, an increase on ₹6.84b, over one year. On the flip side, it has ₹4.79b in cash leading to net debt of about ₹8.49b.

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

We can see from the most recent balance sheet that Sterling and Wilson Renewable Energy had liabilities of ₹26.6b falling due within a year, and liabilities of ₹4.63b due beyond that. Offsetting these obligations, it had cash of ₹4.79b as well as receivables valued at ₹7.62b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹18.8b.

Sterling and Wilson Renewable Energy has a market capitalization of ₹56.2b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Sterling and Wilson Renewable Energy's ability to maintain a healthy balance sheet going forward. 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 had a loss before interest and tax, and actually shrunk its revenue by 45%, to ₹30b. To be frank that doesn't bode well.

Caveat Emptor

While Sterling and Wilson Renewable Energy's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost a very considerable ₹8.8b at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled ₹16b in negative free cash flow over the last twelve months. So in short it's a really risky stock. 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. Case in point: We've spotted 1 warning sign for Sterling and Wilson Renewable Energy you should be aware of.

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.