Is Swan Energy (NSE:SWANENERGY) Using Too Much Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. As with many other companies Swan Energy Limited (NSE:SWANENERGY) makes use of debt. 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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 examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Swan Energy

What Is Swan Energy's Debt?

The image below, which you can click on for greater detail, shows that at September 2022 Swan Energy had debt of ₹42.3b, up from ₹37.2b in one year. However, it does have ₹6.53b in cash offsetting this, leading to net debt of about ₹35.8b.

A Look At Swan Energy's Liabilities

We can see from the most recent balance sheet that Swan Energy had liabilities of ₹11.7b falling due within a year, and liabilities of ₹36.1b due beyond that. Offsetting this, it had ₹6.53b in cash and ₹4.81b in receivables that were due within 12 months. So it has liabilities totalling ₹36.4b more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Swan Energy has a market capitalization of ₹77.2b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. There's no doubt that we learn most about debt from the balance sheet. But it is Swan Energy's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Swan Energy reported revenue of ₹8.2b, which is a gain of 191%, although it did not report any earnings before interest and tax. So there's no doubt that shareholders are cheering for growth

Caveat Emptor

Despite the top line growth, Swan Energy still had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at ₹544m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through ₹5.0b of cash over the last year. So suffice it to say we consider the stock very risky. 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 4 warning signs for Swan Energy (2 are potentially serious) 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.

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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.