Borosil Renewables (NSE:BORORENEW) Has A Pretty Healthy Balance Sheet

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Borosil Renewables Limited (NSE:BORORENEW) does carry debt. But is this debt a concern to shareholders?

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. If things get really bad, the lenders can take control of the business. 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. 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.

View our latest analysis for Borosil Renewables

What Is Borosil Renewables's Net Debt?

As you can see below, Borosil Renewables had ₹712.8m of debt at September 2021, down from ₹742.8m a year prior. But it also has ₹2.80b in cash to offset that, meaning it has ₹2.09b net cash.

How Healthy Is Borosil Renewables' Balance Sheet?

We can see from the most recent balance sheet that Borosil Renewables had liabilities of ₹797.0m falling due within a year, and liabilities of ₹875.2m due beyond that. Offsetting this, it had ₹2.80b in cash and ₹1.06b in receivables that were due within 12 months. So it can boast ₹2.19b more liquid assets than total liabilities.

This surplus suggests that Borosil Renewables has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Borosil Renewables boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that Borosil Renewables grew its EBIT by 642% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Borosil Renewables 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Borosil Renewables 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, Borosil Renewables recorded negative free cash flow, in total. Debt is far more risky for companies with unreliable free cash flow, so shareholders should be hoping that the past expenditure will produce free cash flow in the future.

Summing up

While it is always sensible to investigate a company's debt, in this case Borosil Renewables has ₹2.09b in net cash and a decent-looking balance sheet. And we liked the look of last year's 642% year-on-year EBIT growth. So we don't think Borosil Renewables's use of debt is risky. 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 - Borosil Renewables has 2 warning signs we think you should be aware of.

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.

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.

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