Thermax (NSE:THERMAX) Seems To Use Debt Rather Sparingly

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 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. As with many other companies Thermax Limited (NSE:THERMAX) makes use of debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Thermax

What Is Thermax's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2021 Thermax had ₹3.30b of debt, an increase on ₹2.52b, over one year. However, it does have ₹20.8b in cash offsetting this, leading to net cash of ₹17.5b.

How Strong Is Thermax's Balance Sheet?

The latest balance sheet data shows that Thermax had liabilities of ₹30.7b due within a year, and liabilities of ₹1.85b falling due after that. Offsetting this, it had ₹20.8b in cash and ₹15.9b in receivables that were due within 12 months. So it actually has ₹4.18b more liquid assets than total liabilities.

This short term liquidity is a sign that Thermax could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Thermax boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Thermax grew its EBIT by 83% over the last twelve months, and that growth will make it easier to handle its debt. 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 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Thermax may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Happily for any shareholders, Thermax actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

While it is always sensible to investigate a company's debt, in this case Thermax has ₹17.5b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of ₹6.9b, being 110% of its EBIT. 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.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

When trading Thermax or any other investment, use the platform considered by many to be the Professional's Gateway to the Worlds Market, Interactive Brokers. You get the lowest-cost* trading on stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.