Does Genus Power Infrastructures (NSE:GENUSPOWER) Have A Healthy Balance Sheet?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. As with many other companies Genus Power Infrastructures Limited (NSE:GENUSPOWER) makes use of debt. But the real question is whether this debt is making the company risky.

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Genus Power Infrastructures

How Much Debt Does Genus Power Infrastructures Carry?

The image below, which you can click on for greater detail, shows that at March 2022 Genus Power Infrastructures had debt of ₹2.70b, up from ₹2.07b in one year. But it also has ₹3.00b in cash to offset that, meaning it has ₹295.8m net cash.

How Healthy Is Genus Power Infrastructures' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Genus Power Infrastructures had liabilities of ₹5.03b due within 12 months and liabilities of ₹519.3m due beyond that. Offsetting these obligations, it had cash of ₹3.00b as well as receivables valued at ₹5.69b due within 12 months. So it actually has ₹3.13b more liquid assets than total liabilities.

This short term liquidity is a sign that Genus Power Infrastructures could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Genus Power Infrastructures boasts net cash, so it's fair to say it does not have a heavy debt load!

Shareholders should be aware that Genus Power Infrastructures's EBIT was down 52% 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. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Genus Power Infrastructures 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. Genus Power Infrastructures may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, Genus Power Infrastructures generated free cash flow amounting to a very robust 86% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Genus Power Infrastructures has net cash of ₹295.8m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of ₹125m, being 86% of its EBIT. So we are not troubled with Genus Power Infrastructures'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. For example Genus Power Infrastructures has 3 warning signs (and 1 which shouldn't be ignored) we think you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.