Is Coal India (NSE:COALINDIA) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Coal India Limited (NSE:COALINDIA) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

Check out the opportunities and risks within the IN Oil and Gas industry.

What Is Coal India's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2022 Coal India had ₹37.1b of debt, an increase on ₹33.4b, over one year. However, its balance sheet shows it holds ₹444.5b in cash, so it actually has ₹407.4b net cash.

A Look At Coal India's Liabilities

Zooming in on the latest balance sheet data, we can see that Coal India had liabilities of ₹568.3b due within 12 months and liabilities of ₹811.8b due beyond that. On the other hand, it had cash of ₹444.5b and ₹211.7b worth of receivables due within a year. So its liabilities total ₹723.9b more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Coal India has a huge market capitalization of ₹1.58t, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. 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 88% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Coal India'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, a company can only pay off debt with cold hard cash, not accounting profits. Coal India 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. 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

While Coal India does have more liabilities than liquid assets, it also has net cash of ₹407.4b. And it impressed us with its EBIT growth of 88% over the last year. 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 example Coal India has 2 warning signs (and 1 which is concerning) we think you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.