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

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. As with many other companies India Power Corporation Limited (NSE:DPSCLTD) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for India Power

How Much Debt Does India Power Carry?

You can click the graphic below for the historical numbers, but it shows that India Power had ₹2.80b of debt in March 2023, down from ₹3.23b, one year before. On the flip side, it has ₹253.6m in cash leading to net debt of about ₹2.55b.

How Healthy Is India Power's Balance Sheet?

The latest balance sheet data shows that India Power had liabilities of ₹5.08b due within a year, and liabilities of ₹5.06b falling due after that. Offsetting these obligations, it had cash of ₹253.6m as well as receivables valued at ₹1.46b due within 12 months. So it has liabilities totalling ₹8.43b more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of ₹12.2b, so it does suggest shareholders should keep an eye on India Power's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. 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.

In the last year India Power wasn't profitable at an EBIT level, but managed to grow its revenue by 7.0%, to ₹6.2b. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Importantly, India Power had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost ₹353m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Surprisingly, we note that it actually reported positive free cash flow of ₹580m and a profit of ₹158m. So if we focus on those metrics there seems to be a chance the company will manage its debt without much trouble. 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. Case in point: We've spotted 1 warning sign for India Power you should be aware of.

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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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.