We Think Thermax (NSE:THERMAX) Can Stay On Top Of Its Debt

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 Thermax Limited (NSE:THERMAX) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 ₹2.91b of debt, an increase on ₹2.38b, over one year. But it also has ₹24.3b in cash to offset that, meaning it has ₹21.3b net cash.

How Strong Is Thermax's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Thermax had liabilities of ₹30.7b due within 12 months and liabilities of ₹1.85b due beyond that. Offsetting these obligations, it had cash of ₹24.3b as well as receivables valued at ₹12.6b due within 12 months. So it actually has ₹4.26b more liquid assets than total liabilities.

This surplus suggests that Thermax has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Thermax has more cash than debt is arguably a good indication that it can manage its debt safely.

But the bad news is that Thermax has seen its EBIT plunge 16% in the last twelve months. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. When analysing debt levels, the balance sheet is the obvious place to start. 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. 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. During the last three years, Thermax produced sturdy free cash flow equating to 78% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing up

While it is always sensible to investigate a company's debt, in this case Thermax has ₹21.3b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 78% of that EBIT to free cash flow, bringing in ₹6.9b. So we don't have any problem with Thermax's use of debt. 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.

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