Does Coal India (NSE:COALINDIA) Have A Healthy Balance Sheet?

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.' 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 can see that Coal India Limited (NSE:COALINDIA) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 Coal India

What Is Coal India's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Coal India had ₹33.1b of debt in March 2022, down from ₹58.8b, one year before. However, it does have ₹364.6b in cash offsetting this, leading to net cash of ₹331.5b.

How Healthy Is Coal India's Balance Sheet?

According to the last reported balance sheet, Coal India had liabilities of ₹574.0b due within 12 months, and liabilities of ₹790.2b due beyond 12 months. Offsetting this, it had ₹364.6b in cash and ₹205.2b in receivables that were due within 12 months. So its liabilities total ₹794.5b more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its very significant market capitalization of ₹1.13t, so it does suggest shareholders should keep an eye on Coal India's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. While it does have liabilities worth noting, Coal India also has more cash than debt, so we're pretty confident it can manage its debt safely.

On top of that, Coal India grew its EBIT by 35% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Coal India 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Coal India 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. During the last three years, Coal India produced sturdy free cash flow equating to 52% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing up

Although Coal India's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of ₹331.5b. And we liked the look of last year's 35% year-on-year EBIT growth. So we are not troubled with Coal India's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 1 warning sign we've spotted with Coal India .

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.