S.P.E.E.H. Hidroelectrica (BVB:H2O) Has A Rock Solid Balance Sheet

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for S.P.E.E.H. Hidroelectrica

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

You can click the graphic below for the historical numbers, but it shows that S.P.E.E.H. Hidroelectrica had RON370.0m of debt in March 2024, down from RON461.4m, one year before. But on the other hand it also has RON7.14b in cash, leading to a RON6.77b net cash position.

How Strong Is S.P.E.E.H. Hidroelectrica's Balance Sheet?

The latest balance sheet data shows that S.P.E.E.H. Hidroelectrica had liabilities of RON1.48b due within a year, and liabilities of RON3.00b falling due after that. On the other hand, it had cash of RON7.14b and RON2.42b worth of receivables due within a year. So it actually has RON5.08b 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. Succinctly put, S.P.E.E.H. Hidroelectrica boasts net cash, so it's fair to say it does not have a heavy debt load!

Another good sign is that S.P.E.E.H. Hidroelectrica has been able to increase its EBIT by 22% in twelve months, making it easier to pay down debt. When analysing debt levels, the balance sheet is the obvious place to start. 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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. Over the last three years, S.P.E.E.H. Hidroelectrica recorded free cash flow worth a fulsome 85% of its EBIT, which is stronger than we'd usually 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 RON6.77b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of RON6.4b, being 85% of its EBIT. So is S.P.E.E.H. Hidroelectrica's debt a risk? It doesn't seem so to us. 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 S.P.E.E.H. Hidroelectrica is showing 2 warning signs in our investment analysis , you should know about...

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.