S. E. Power (NSE:SEPOWER) Has Debt But No Earnings; Should You Worry?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for S. E. Power

What Is S. E. Power's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2021 S. E. Power had ₹751.5m of debt, an increase on ₹684.8m, over one year. And it doesn't have much cash, so its net debt is about the same.

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

The latest balance sheet data shows that S. E. Power had liabilities of ₹99.2m due within a year, and liabilities of ₹672.1m falling due after that. On the other hand, it had cash of ₹3.30m and ₹83.5m worth of receivables due within a year. So it has liabilities totalling ₹684.6m more than its cash and near-term receivables, combined.

This deficit casts a shadow over the ₹308.6m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, S. E. Power would likely require a major re-capitalisation if it had to pay its creditors today. The balance sheet is clearly the area to focus on when you are analysing debt. 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 92%, to ₹335m. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

Even though S. E. Power managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. Indeed, it lost ₹27m at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it had negative free cash flow of ₹76m over the last twelve months. So suffice it to say we consider the stock to be 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. These risks can be hard to spot. Every company has them, and we've spotted 5 warning signs for S. E. Power (of which 3 are significant!) 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.

When trading S. E. Power or any other investment, use the platform considered by many to be the Professional's Gateway to the Worlds Market, Interactive Brokers. You get the lowest-cost* trading on stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

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