Stock Analysis

Does India Power (NSE:DPSCLTD) Have A Healthy Balance Sheet?

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Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We can see that India Power Corporation Limited (NSE:DPSCLTD) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for India Power

What Is India Power's Net Debt?

The image below, which you can click on for greater detail, shows that India Power had debt of ₹2.12b at the end of September 2020, a reduction from ₹4.42b over a year. However, its balance sheet shows it holds ₹2.77b in cash, so it actually has ₹650.4m net cash.

NSEI:DPSCLTD Debt to Equity History November 18th 2020

A Look At India Power's Liabilities

The latest balance sheet data shows that India Power had liabilities of ₹4.98b due within a year, and liabilities of ₹4.22b falling due after that. Offsetting these obligations, it had cash of ₹2.77b as well as receivables valued at ₹1.78b due within 12 months. So its liabilities total ₹4.65b more than the combination of its cash and short-term receivables.

This deficit isn't so bad because India Power is worth ₹11.6b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. Despite its noteworthy liabilities, India Power boasts net cash, so it's fair to say it does not have a heavy debt load!

One way India Power could vanquish its debt would be if it stops borrowing more but continues to grow EBIT at around 18%, as it did over the last year. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since India Power will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. India Power 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. Over the last three years, India Power 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 India Power does have more liabilities than liquid assets, it also has net cash of ₹650.4m. And it impressed us with its EBIT growth of 18% over the last year. So while India Power does not have a great balance sheet, it's certainly not too bad. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Be aware that India Power is showing 2 warning signs in our investment analysis , and 1 of those makes us a bit uncomfortable...

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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