Is S. E. Power (NSE:SEPOWER) Using Debt Sensibly?

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 S. E. Power Limited (NSE:SEPOWER) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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.

Check out our latest analysis for S. E. Power

What Is S. E. Power's Debt?

As you can see below, at the end of September 2022, S. E. Power had ₹859.8m of debt, up from ₹807.6m a year ago. Click the image for more detail. And it doesn't have much cash, so its net debt is about the same.

How Healthy Is S. E. Power's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that S. E. Power had liabilities of ₹101.3m due within 12 months and liabilities of ₹797.5m due beyond that. Offsetting these obligations, it had cash of ₹15.1m as well as receivables valued at ₹77.3m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹806.4m.

When you consider that this deficiency exceeds the company's ₹645.7m market capitalization, you might well be inclined to review the balance sheet intently. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since S. E. Power will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year S. E. Power wasn't profitable at an EBIT level, but managed to grow its revenue by 22%, to ₹540m. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

Despite the top line growth, S. E. Power still had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost ₹16m at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it burned through ₹42m in negative free cash flow over the last year. That means it's on the risky side of things. 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 2 warning signs for S. E. Power 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.