Premier Energies (NSE:PREMIERENE) Has A Pretty Healthy Balance Sheet

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.' 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. We note that Premier Energies Limited (NSE:PREMIERENE) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Premier Energies

What Is Premier Energies's Debt?

The image below, which you can click on for greater detail, shows that Premier Energies had debt of ₹12.5b at the end of September 2024, a reduction from ₹13.9b over a year. However, its balance sheet shows it holds ₹20.3b in cash, so it actually has ₹7.78b net cash.

How Strong Is Premier Energies' Balance Sheet?

According to the last reported balance sheet, Premier Energies had liabilities of ₹18.6b due within 12 months, and liabilities of ₹11.2b due beyond 12 months. On the other hand, it had cash of ₹20.3b and ₹5.81b worth of receivables due within a year. So its liabilities total ₹3.70b more than the combination of its cash and short-term receivables.

This state of affairs indicates that Premier Energies' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the ₹450.5b company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, Premier Energies also has more cash than debt, so we're pretty confident it can manage its debt safely.

Even more impressive was the fact that Premier Energies grew its EBIT by 273% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Premier Energies can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Premier Energies 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. Considering the last three years, Premier Energies actually recorded a cash outflow, overall. 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

We could understand if investors are concerned about Premier Energies's liabilities, but we can be reassured by the fact it has has net cash of ₹7.78b. And it impressed us with its EBIT growth of 273% over the last year. So we are not troubled with Premier Energies's debt use. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Premier Energies 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.

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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.