Havells India (NSE:HAVELLS) seems to be using debt quite wisely

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Howard Marks said it well when he said that, rather than worrying about stock price volatility, “the possibility of permanent loss is the risk I worry about…and that every practical investor that I know is worried”. So it seems smart money knows that debt – which is usually involved in bankruptcies – is a very important factor when you’re assessing a company’s risk. We can see that Havells India Limited (NSE:HAVELLS) uses debt in its business. But does this debt worry shareholders?

Why is debt risky?

Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, it exists at their mercy. In the worst case, a company can go bankrupt if it cannot pay its creditors. Although not too common, we often see companies in debt permanently diluting their shareholders because lenders force them to raise capital at a ridiculous price. Of course, many companies use debt to finance their growth, without any negative consequences. The first thing to do when considering how much debt a business has is to look at its cash and debt together.

Check out our latest analysis for Havells India

What is Havells India’s net debt?

As you can see below, Havells India had a debt of ₹6.16 billion, as of March 2022, which is about the same as the previous year. You can click on the graph for more details. However, his balance sheet shows that he holds ₹27.0 billion in cash, so he actually has ₹20.8 billion in net cash.

NSEI:HAVELLS Debt to Equity September 12, 2022

How strong is Havells India’s balance sheet?

We can see from the most recent balance sheet that Havells India had liabilities of ₹36.3 billion due within a year, and liabilities of ₹8.87 billion due beyond. In return, he had ₹27.0 billion in cash and ₹8.29 billion in receivables due within 12 months. Thus, its liabilities total ₹9.93 billion more than the combination of its cash and short-term receivables.

Given the size of Havells India, it appears its liquid assets are well balanced against its total liabilities. It is therefore highly unlikely that the ₹843.3bn company will run out of cash, but it is still worth keeping an eye on the balance sheet. Despite its notable liabilities, Havells India has a net cash position, so it’s fair to say that it doesn’t have a lot of debt!

In contrast, Havells India has seen its EBIT fall by 3.2% over the past twelve months. If earnings continue to decline at this rate, the company could find it increasingly difficult to manage its debt. The balance sheet is clearly the area to focus on when analyzing debt. But ultimately, the company’s future profitability will decide whether Havells India can strengthen its balance sheet over time. So if you are focused on the future, you can check out this free report showing analyst earnings forecast.

Finally, a company can only repay its debts with cold hard cash, not with book profits. Havells India may have net cash on the balance sheet, but it is always interesting to see how well the company converts its earnings before interest and tax (EBIT) into free cash flow, as this will influence both its needs and its capacity. . to manage debt. Over the past three years, Havells India has recorded free cash flow of 77% of its EBIT, which is about normal given that free cash flow excludes interest and taxes. This cold hard cash allows him to reduce his debt whenever he wants.

Summary

While it’s always a good idea to look at a company’s total liabilities, it’s very reassuring that Havells India has ₹20.8 billion in net cash. The icing on the cake was that he converted 77% of that EBIT into free cash flow, bringing in ₹15 billion. We therefore do not believe that Havells India’s use of debt is risky. When analyzing debt levels, the balance sheet is the obvious starting point. However, not all investment risks reside on the balance sheet, far from it. To this end, you should be aware of the 1 warning sign we spotted with Havells India.

In the end, it’s often best to focus on companies that aren’t in debt. You can access our special list of these companies (all with a track record of earnings growth). It’s free.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

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