Is Voltas (NSE:VOLTAS) A Risky Investment?

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. We can see that Voltas Limited (NSE:VOLTAS) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Voltas

How Much Debt Does Voltas Carry?

You can click the graphic below for the historical numbers, but it shows that Voltas had ₹3.67b of debt in September 2022, down from ₹4.14b, one year before. But it also has ₹12.3b in cash to offset that, meaning it has ₹8.60b net cash.

How Strong Is Voltas' Balance Sheet?

We can see from the most recent balance sheet that Voltas had liabilities of ₹34.8b falling due within a year, and liabilities of ₹1.55b due beyond that. Offsetting these obligations, it had cash of ₹12.3b as well as receivables valued at ₹26.0b due within 12 months. So it actually has ₹1.94b more liquid assets than total liabilities.

Having regard to Voltas' size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the ₹268.0b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, Voltas boasts net cash, so it's fair to say it does not have a heavy debt load!

But the other side of the story is that Voltas saw its EBIT decline by 9.5% over the last year. That sort of decline, if sustained, will obviously make debt harder to handle. 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 Voltas can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Voltas 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. Looking at the most recent three years, Voltas recorded free cash flow of 39% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While it is always sensible to investigate a company's debt, in this case Voltas has ₹8.60b in net cash and a decent-looking balance sheet. So we don't have any problem with Voltas's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for Voltas that you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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

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.