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.' 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 Coal India Limited (NSE:COALINDIA) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Coal India

How Much Debt Does Coal India Carry?

As you can see below, at the end of September 2024, Coal India had ₹78.2b of debt, up from ₹63.1b a year ago. Click the image for more detail. However, it does have ₹370.3b in cash offsetting this, leading to net cash of ₹292.1b.

How Strong Is Coal India's Balance Sheet?

According to the last reported balance sheet, Coal India had liabilities of ₹598.0b due within 12 months, and liabilities of ₹925.1b due beyond 12 months. Offsetting these obligations, it had cash of ₹370.3b as well as receivables valued at ₹246.8b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹906.0b.

While this might seem like a lot, it is not so bad since Coal India has a huge market capitalization of ₹2.23t, 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. 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.

And we also note warmly that Coal India grew its EBIT by 20% last year, making its debt load easier to handle. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Coal India can strengthen its balance sheet over time. 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 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. In the last three years, Coal India's free cash flow amounted to 35% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

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 ₹292.1b. And we liked the look of last year's 20% year-on-year EBIT growth. So we are not troubled with Coal India's debt use. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for Coal India that 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.