Health Check: How Prudently Does Indowind Energy (NSE:INDOWIND) Use Debt?

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.' 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. Importantly, Indowind Energy Limited (NSE:INDOWIND) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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 Indowind Energy

What Is Indowind Energy's Debt?

You can click the graphic below for the historical numbers, but it shows that Indowind Energy had ₹908.3m of debt in September 2020, down from ₹960.6m, one year before. However, it also had ₹28.3m in cash, and so its net debt is ₹880.0m.

A Look At Indowind Energy's Liabilities

Zooming in on the latest balance sheet data, we can see that Indowind Energy had liabilities of ₹59.1m due within 12 months and liabilities of ₹876.1m due beyond that. On the other hand, it had cash of ₹28.3m and ₹71.0m worth of receivables due within a year. So its liabilities total ₹835.9m more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the ₹412.8m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Indowind Energy would probably need a major re-capitalization if its creditors were to demand repayment. There's no doubt that we learn most about debt from the balance sheet. But it is Indowind Energy's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Indowind Energy had a loss before interest and tax, and actually shrunk its revenue by 39%, to ₹145m. That makes us nervous, to say the least.

Caveat Emptor

Not only did Indowind Energy's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost ₹32m at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it had negative free cash flow of ₹3.2m over the last twelve months. That means it's on the risky side of things. 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. For instance, we've identified 4 warning signs for Indowind Energy (2 don't sit too well with us) 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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