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

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We can see that Borosil Renewables Limited (NSE:BORORENEW) does use debt in its business. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Borosil Renewables

What Is Borosil Renewables's Net Debt?

The image below, which you can click on for greater detail, shows that at March 2022 Borosil Renewables had debt of ₹1.57b, up from ₹788.7m in one year. However, it does have ₹2.32b in cash offsetting this, leading to net cash of ₹747.6m.

A Look At Borosil Renewables' Liabilities

The latest balance sheet data shows that Borosil Renewables had liabilities of ₹1.03b due within a year, and liabilities of ₹1.68b falling due after that. Offsetting these obligations, it had cash of ₹2.32b as well as receivables valued at ₹704.0m due within 12 months. So it can boast ₹318.3m more liquid assets than total liabilities.

This state of affairs indicates that Borosil Renewables' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the ₹86.7b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, Borosil Renewables boasts net cash, so it's fair to say it does not have a heavy debt load!

Another good sign is that Borosil Renewables has been able to increase its EBIT by 29% in twelve months, making it easier to pay down debt. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Borosil Renewables 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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. During the last three years, Borosil Renewables burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing up

While it is always sensible to investigate a company's debt, in this case Borosil Renewables has ₹747.6m in net cash and a decent-looking balance sheet. And we liked the look of last year's 29% year-on-year EBIT growth. So we are not troubled with Borosil Renewables's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 1 warning sign for Borosil Renewables that you should be aware of.

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.

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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.