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

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.' 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. As with many other companies Genus Power Infrastructures Limited (NSE:GENUSPOWER) makes use of debt. But should shareholders be worried about its use of debt?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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 examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Genus Power Infrastructures

What Is Genus Power Infrastructures's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2023 Genus Power Infrastructures had ₹3.41b of debt, an increase on ₹2.45b, over one year. But on the other hand it also has ₹4.89b in cash, leading to a ₹1.48b net cash position.

How Strong Is Genus Power Infrastructures' Balance Sheet?

We can see from the most recent balance sheet that Genus Power Infrastructures had liabilities of ₹6.78b falling due within a year, and liabilities of ₹504.5m due beyond that. Offsetting this, it had ₹4.89b in cash and ₹5.89b in receivables that were due within 12 months. So it actually has ₹3.50b more liquid assets than total liabilities.

This surplus suggests that Genus Power Infrastructures has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Genus Power Infrastructures boasts net cash, so it's fair to say it does not have a heavy debt load!

It is well worth noting that Genus Power Infrastructures's EBIT shot up like bamboo after rain, gaining 69% in the last twelve months. That'll make it easier to manage its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Genus Power Infrastructures 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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. In the last three years, Genus Power Infrastructures created free cash flow amounting to 16% of its EBIT, an uninspiring performance. For us, cash conversion that low sparks a little paranoia about is ability to extinguish 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 ₹1.48b, as well as more liquid assets than liabilities. And we liked the look of last year's 69% year-on-year EBIT growth. So we are not troubled with Genus Power Infrastructures'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 example, we've discovered 3 warning signs for Genus Power Infrastructures that you should be aware of before investing here.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.