Is Thermax (NSE:THERMAX) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Thermax Limited (NSE:THERMAX) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own 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.

View our latest analysis for Thermax

How Much Debt Does Thermax Carry?

As you can see below, at the end of March 2022, Thermax had ₹3.55b of debt, up from ₹3.19b a year ago. Click the image for more detail. However, it does have ₹17.2b in cash offsetting this, leading to net cash of ₹13.6b.

A Look At Thermax's Liabilities

The latest balance sheet data shows that Thermax had liabilities of ₹37.6b due within a year, and liabilities of ₹2.11b falling due after that. On the other hand, it had cash of ₹17.2b and ₹14.4b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹8.04b.

Since publicly traded Thermax shares are worth a total of ₹229.9b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Thermax boasts net cash, so it's fair to say it does not have a heavy debt load!

Also positive, Thermax grew its EBIT by 28% in the last year, and that should make it easier to pay down debt, going forward. 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 Thermax 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Thermax 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. Happily for any shareholders, Thermax actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

We could understand if investors are concerned about Thermax's liabilities, but we can be reassured by the fact it has has net cash of ₹13.6b. The cherry on top was that in converted 144% of that EBIT to free cash flow, bringing in ₹2.4b. So is Thermax'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 Thermax, you may well want to click here to check an interactive graph of its earnings per share history.

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.