Websol Energy System (NSE:WEBELSOLAR) Is Carrying A Fair Bit Of 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 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. Importantly, Websol Energy System Limited (NSE:WEBELSOLAR) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Websol Energy System

What Is Websol Energy System's Debt?

As you can see below, Websol Energy System had ₹362.6m of debt, at September 2022, which is about the same as the year before. You can click the chart for greater detail. However, it also had ₹15.9m in cash, and so its net debt is ₹346.7m.

How Healthy Is Websol Energy System's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Websol Energy System had liabilities of ₹657.1m due within 12 months and liabilities of ₹221.3m due beyond that. Offsetting these obligations, it had cash of ₹15.9m as well as receivables valued at ₹44.5m due within 12 months. So it has liabilities totalling ₹818.0m more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Websol Energy System has a market capitalization of ₹2.48b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Websol Energy System 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.

Over 12 months, Websol Energy System made a loss at the EBIT level, and saw its revenue drop to ₹797m, which is a fall of 60%. That makes us nervous, to say the least.

Caveat Emptor

Not only did Websol Energy System's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost ₹213m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through ₹40m of cash over the last year. So to be blunt we think it is 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. For instance, we've identified 2 warning signs for Websol Energy System 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.