Is Genus Power Infrastructures (NSE:GENUSPOWER) A Risky Investment?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. 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?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt 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 Genus Power Infrastructures had debt of ₹2.08b at the end of March 2021, a reduction from ₹2.56b over a year. But it also has ₹2.89b in cash to offset that, meaning it has ₹814.1m 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 ₹4.05b falling due within a year, and liabilities of ₹563.7m due beyond that. Offsetting these obligations, it had cash of ₹2.89b as well as receivables valued at ₹5.66b due within 12 months. So it can boast ₹3.94b 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!

Importantly, Genus Power Infrastructures's EBIT fell a jaw-dropping 42% in the last twelve months. If that decline continues then paying off debt will be harder than selling foie gras at a vegan convention. The balance sheet is clearly the area to focus on when you are analysing debt. 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 most recent three years, Genus Power Infrastructures recorded free cash flow worth 73% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

While it is always sensible to investigate a company's debt, in this case Genus Power Infrastructures has ₹814.1m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of ₹964m, being 73% of its EBIT. So we are not troubled with Genus Power Infrastructures's debt use. 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 (1 is potentially serious) you should be aware of.

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. 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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