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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Genus Power Infrastructures Limited (NSE:GENUSPOWER) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. 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. 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.

Check out our latest analysis for Genus Power Infrastructures

What Is Genus Power Infrastructures's Net Debt?

The image below, which you can click on for greater detail, shows that at March 2024 Genus Power Infrastructures had debt of ₹5.87b, up from ₹3.47b in one year. However, its balance sheet shows it holds ₹8.57b in cash, so it actually has ₹2.69b net cash.

How Strong Is Genus Power Infrastructures' Balance Sheet?

According to the last reported balance sheet, Genus Power Infrastructures had liabilities of ₹9.88b due within 12 months, and liabilities of ₹2.08b due beyond 12 months. On the other hand, it had cash of ₹8.57b and ₹6.97b worth of receivables due within a year. So it actually has ₹3.58b 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. Simply put, the fact that Genus Power Infrastructures has more cash than debt is arguably a good indication that it can manage its debt safely.

Importantly, Genus Power Infrastructures grew its EBIT by 84% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Genus Power Infrastructures can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

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 saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Genus Power Infrastructures has net cash of ₹2.69b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 84% over the last year. So we don't have any problem with Genus Power Infrastructures's use of debt. 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 instance, we've identified 2 warning signs for Genus Power Infrastructures (1 is a bit concerning) 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.

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