Genus Power Infrastructures (NSE:GENUSPOWER) Seems To Use Debt Quite Sensibly

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Genus Power Infrastructures Limited (NSE:GENUSPOWER) does carry debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Genus Power Infrastructures

What Is Genus Power Infrastructures's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2021 Genus Power Infrastructures had ₹2.39b of debt, an increase on ₹1.75b, over one year. But it also has ₹2.90b in cash to offset that, meaning it has ₹507.4m net cash.

A Look At Genus Power Infrastructures' Liabilities

We can see from the most recent balance sheet that Genus Power Infrastructures had liabilities of ₹4.39b falling due within a year, and liabilities of ₹489.6m due beyond that. Offsetting this, it had ₹2.90b in cash and ₹5.78b in receivables that were due within 12 months. So it actually has ₹3.80b more liquid assets than total liabilities.

It's good to see that Genus Power Infrastructures has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, Genus Power Infrastructures boasts net cash, so it's fair to say it does not have a heavy debt load!

The modesty of its debt load may become crucial for Genus Power Infrastructures if management cannot prevent a repeat of the 21% cut to EBIT over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. There's no doubt that we learn most about debt from the balance sheet. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Genus Power Infrastructures 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, Genus Power Infrastructures recorded free cash flow worth a fulsome 81% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing up

While it is always sensible to investigate a company's debt, in this case Genus Power Infrastructures has ₹507.4m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 81% of that EBIT to free cash flow, bringing in ₹420m. So is Genus Power Infrastructures's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for Genus Power Infrastructures 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.

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.

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