Is Sterling and Wilson Solar (NSE:SWSOLAR) Using Debt Sensibly?

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.' 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 Solar Limited (NSE:SWSOLAR) 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. 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, 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.

See our latest analysis for Sterling and Wilson Solar

How Much Debt Does Sterling and Wilson Solar Carry?

The image below, which you can click on for greater detail, shows that Sterling and Wilson Solar had debt of ₹4.68b at the end of March 2021, a reduction from ₹12.2b over a year. However, its balance sheet shows it holds ₹4.99b in cash, so it actually has ₹304.9m net cash.

A Look At Sterling and Wilson Solar's Liabilities

We can see from the most recent balance sheet that Sterling and Wilson Solar had liabilities of ₹30.2b falling due within a year, and liabilities of ₹352.3m due beyond that. Offsetting these obligations, it had cash of ₹4.99b as well as receivables valued at ₹17.5b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹7.98b.

Of course, Sterling and Wilson Solar has a market capitalization of ₹43.6b, 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. While it does have liabilities worth noting, Sterling and Wilson Solar also has more cash than debt, so we're pretty confident it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is Sterling and Wilson Solar's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Sterling and Wilson Solar had a loss before interest and tax, and actually shrunk its revenue by 6.1%, to ₹52b. That's not what we would hope to see.

So How Risky Is Sterling and Wilson Solar?

Although Sterling and Wilson Solar had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of ₹1.8b. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. Until we see some positive EBIT, we're a bit cautious of the stock, not least because of the rather modest revenue growth. 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. To that end, you should learn about the 4 warning signs we've spotted with Sterling and Wilson Solar (including 1 which can't be ignored) .

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. 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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