Voltas (NSE:VOLTAS) 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 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 note that Voltas Limited (NSE:VOLTAS) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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 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. 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 think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Voltas

What Is Voltas's Net Debt?

As you can see below, Voltas had ₹4.14b of debt, at September 2021, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has ₹7.01b in cash, leading to a ₹2.87b net cash position.

How Healthy Is Voltas' Balance Sheet?

The latest balance sheet data shows that Voltas had liabilities of ₹29.2b due within a year, and liabilities of ₹1.31b falling due after that. Offsetting this, it had ₹7.01b in cash and ₹26.1b in receivables that were due within 12 months. So it actually has ₹2.57b 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 ₹412.5b 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!

In addition to that, we're happy to report that Voltas has boosted its EBIT by 64%, 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Voltas 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. In the last three years, Voltas's free cash flow amounted to 47% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing up

While it is always sensible to investigate a company's debt, in this case Voltas has ₹2.87b in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 64% over the last year. So we don't think Voltas's use of debt is risky. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Voltas's earnings per share history for free.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.