BPL (NSE:BPL) Has A Pretty Healthy Balance Sheet

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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 BPL Limited (NSE:BPL) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. 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, 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 BPL

What Is BPL's Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2021 BPL had ₹126.2m of debt, an increase on ₹119.4m, over one year. However, it does have ₹1.05b in cash offsetting this, leading to net cash of ₹919.4m.

How Strong Is BPL's Balance Sheet?

We can see from the most recent balance sheet that BPL had liabilities of ₹2.02b falling due within a year, and liabilities of ₹42.6m due beyond that. Offsetting these obligations, it had cash of ₹1.05b as well as receivables valued at ₹156.7m due within 12 months. So it has liabilities totalling ₹861.5m more than its cash and near-term receivables, combined.

This deficit isn't so bad because BPL is worth ₹2.45b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. Despite its noteworthy liabilities, BPL boasts net cash, so it's fair to say it does not have a heavy debt load!

Notably, BPL made a loss at the EBIT level, last year, but improved that to positive EBIT of ₹5.8m in the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since BPL will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. BPL 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, BPL actually produced more free cash flow than EBIT over the last year. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

While BPL does have more liabilities than liquid assets, it also has net cash of ₹919.4m. And it impressed us with free cash flow of ₹16m, being 270% of its EBIT. So we are not troubled with BPL's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 3 warning signs for BPL (1 shouldn't be ignored) you should be aware of.

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.
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