Is Indowind Energy (NSE:INDOWIND) Using Too Much Debt?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. As with many other companies Indowind Energy Limited (NSE:INDOWIND) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. 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.

See our latest analysis for Indowind Energy

What Is Indowind Energy's Debt?

As you can see below, Indowind Energy had ₹192.8m of debt at September 2024, down from ₹313.2m a year prior. However, its balance sheet shows it holds ₹250.5m in cash, so it actually has ₹57.7m net cash.

How Strong Is Indowind Energy's Balance Sheet?

According to the last reported balance sheet, Indowind Energy had liabilities of ₹27.4m due within 12 months, and liabilities of ₹342.1m due beyond 12 months. On the other hand, it had cash of ₹250.5m and ₹110.4m worth of receivables due within a year. So it has liabilities totalling ₹8.53m more than its cash and near-term receivables, combined.

This state of affairs indicates that Indowind Energy's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the ₹2.68b company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Indowind Energy boasts net cash, so it's fair to say it does not have a heavy debt load!

Importantly, Indowind Energy's EBIT fell a jaw-dropping 35% in the last twelve months. If that earnings trend continues then paying off its debt will be about as easy as herding cats on to a roller coaster. 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 Indowind Energy 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Indowind Energy 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. Looking at the most recent three years, Indowind Energy recorded free cash flow of 24% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

We could understand if investors are concerned about Indowind Energy's liabilities, but we can be reassured by the fact it has has net cash of ₹57.7m. So while Indowind Energy does not have a great balance sheet, it's certainly not too bad. 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. To that end, you should be aware of the 5 warning signs we've spotted with Indowind Energy .

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.