Is S.P.E.E.H. Hidroelectrica (BVB:H2O) 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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that S.P.E.E.H. Hidroelectrica S.A. (BVB:H2O) does use debt in its business. But is this debt a concern to shareholders?

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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for S.P.E.E.H. Hidroelectrica

How Much Debt Does S.P.E.E.H. Hidroelectrica Carry?

The image below, which you can click on for greater detail, shows that S.P.E.E.H. Hidroelectrica had debt of RON324.0m at the end of September 2024, a reduction from RON417.1m over a year. But it also has RON3.78b in cash to offset that, meaning it has RON3.46b net cash.

A Look At S.P.E.E.H. Hidroelectrica's Liabilities

According to the last reported balance sheet, S.P.E.E.H. Hidroelectrica had liabilities of RON1.22b due within 12 months, and liabilities of RON3.02b due beyond 12 months. Offsetting these obligations, it had cash of RON3.78b as well as receivables valued at RON1.97b due within 12 months. So it can boast RON1.52b more liquid assets than total liabilities.

This short term liquidity is a sign that S.P.E.E.H. Hidroelectrica could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that S.P.E.E.H. Hidroelectrica has more cash than debt is arguably a good indication that it can manage its debt safely.

In fact S.P.E.E.H. Hidroelectrica's saving grace is its low debt levels, because its EBIT has tanked 23% in the last twelve months. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if S.P.E.E.H. Hidroelectrica can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While S.P.E.E.H. Hidroelectrica 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. During the last three years, S.P.E.E.H. Hidroelectrica generated free cash flow amounting to a very robust 88% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case S.P.E.E.H. Hidroelectrica has RON3.46b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of RON6.6b, being 88% of its EBIT. So we are not troubled with S.P.E.E.H. Hidroelectrica's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 1 warning sign for S.P.E.E.H. Hidroelectrica 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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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.