These 4 Measures Indicate That Voltas (NSE:VOLTAS) Is Using Debt Safely

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Voltas Limited (NSE:VOLTAS) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Voltas

What Is Voltas's Debt?

As you can see below, at the end of September 2024, Voltas had ₹8.71b of debt, up from ₹5.55b a year ago. Click the image for more detail. However, its balance sheet shows it holds ₹19.1b in cash, so it actually has ₹10.4b net cash.

How Healthy Is Voltas' Balance Sheet?

According to the last reported balance sheet, Voltas had liabilities of ₹49.0b due within 12 months, and liabilities of ₹6.36b due beyond 12 months. Offsetting this, it had ₹19.1b in cash and ₹26.9b in receivables that were due within 12 months. So it has liabilities totalling ₹9.29b more than its cash and near-term receivables, combined.

This state of affairs indicates that Voltas' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the ₹465.0b company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, Voltas also has more cash than debt, so we're pretty confident it can manage its debt safely.

In addition to that, we're happy to report that Voltas has boosted its EBIT by 95%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Voltas's ability to maintain a healthy balance sheet going forward. 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. 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. In the last three years, Voltas's free cash flow amounted to 49% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

We could understand if investors are concerned about Voltas's liabilities, but we can be reassured by the fact it has has net cash of ₹10.4b. And it impressed us with its EBIT growth of 95% over the last year. So is Voltas's debt a risk? It doesn't seem so to us. 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. Be aware that Voltas is showing 1 warning sign in our investment analysis , you should know about...

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.