Is Indiabulls Real Estate (NSE:IBREALEST) Using Too Much Debt?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Indiabulls Real Estate Limited (NSE:IBREALEST) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Indiabulls Real Estate

What Is Indiabulls Real Estate's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Indiabulls Real Estate had ₹10.5b of debt in September 2020, down from ₹17.8b, one year before. But on the other hand it also has ₹19.1b in cash, leading to a ₹8.60b net cash position.

How Strong Is Indiabulls Real Estate's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Indiabulls Real Estate had liabilities of ₹60.1b due within 12 months and liabilities of ₹8.16b due beyond that. Offsetting this, it had ₹19.1b in cash and ₹936.0m in receivables that were due within 12 months. So it has liabilities totalling ₹48.2b more than its cash and near-term receivables, combined.

When you consider that this deficiency exceeds the company's ₹32.9b 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. Indiabulls Real Estate boasts net cash, so it's fair to say it does not have a heavy debt load, even if it does have very significant liabilities, in total.

Shareholders should be aware that Indiabulls Real Estate's EBIT was down 97% last year. If that earnings trend continues then paying off its debt will be about as easy as herding cats on to a roller coaster. 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 Indiabulls Real Estate will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Indiabulls Real Estate 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. Over the last three years, Indiabulls Real Estate saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing up

While Indiabulls Real Estate does have more liabilities than liquid assets, it also has net cash of ₹8.60b. Unfortunately, though, both its struggle EBIT growth rate and its conversion of EBIT to free cash flow leave us concerned about Indiabulls Real Estate So even though it has net cash, we do think the business has some risks worth watching. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Consider for instance, the ever-present spectre of investment risk. We've identified 2 warning signs with Indiabulls Real Estate , and understanding them should be part of your investment process.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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This article by Simply Wall St is general in nature. 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.
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