Legendary fund manager Li Lu (whom Charlie Munger supported) once said, “The biggest risk in investing is not price volatility, but the possibility that you will suffer a permanent loss of capital. It is only natural to consider a company’s balance sheet when looking at its level of risk, as debt is often involved when a business collapses. Above all, Inox Wind Limited (NSE: INOXWIND) carries a debt. But should shareholders be concerned about its use of debt?
When is debt dangerous?
Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, then it exists at their mercy. If things really go wrong, lenders can take over the business. While it’s not too common, we often see indebted companies continually diluting their shareholders because lenders are forcing them to raise capital at a ridiculous price. Of course, many companies use debt to finance their growth without negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash flow and debt together.
Check out our latest review for Inox Wind
What is Inox Wind’s net debt?
As you can see below, at the end of September 2021, Inox Wind had 17.0 billion yen in debt, up from 10.2 billion yen a year ago. Click on the image for more details. However, given that it has a cash reserve of 1.36 billion yen, its net debt is less, at around 15.6 billion yen.
A look at the responsibilities of Inox Wind
According to the latest published balance sheet, Inox Wind had liabilities of 38.8 billion yen due within 12 months and liabilities of 4.95 billion yen due beyond 12 months. In return, he had 1.36 billion yen in cash and 10.7 billion yen in receivables due within 12 months. Thus, its liabilities exceed the sum of its cash and its (short-term) receivables by 31.7 billion euros.
When you consider that this shortfall exceeds the company’s ₹ 28.6b market cap, you might well be inclined to take a close look at the balance sheet. Hypothetically, an extremely large dilution would be required if the company was forced to repay its debts by raising capital at the current share price. When analyzing debt levels, the balance sheet is the obvious starting point. But it is the profits of Inox Wind that will influence the balance sheet in the future. So if you want to know more about its profits, it may be worth checking out this chart of its long term profit trend.
In the past year, Inox Wind was not profitable in EBIT, but managed to increase its turnover by 24%, to 7.8 billion euros. The shareholders are probably keeping their fingers crossed that this could generate a profit.
Even though Inox Wind has managed to increase its turnover quite adroitly, the hard truth is that it is losing money on the EBIT line. To be precise, the EBIT loss amounted to 1.8 billion yen. Considering that aside from the liabilities mentioned above, we are nervous about the business. It would have to improve its operation quickly for us to take an interest in it. Notably because it has burned 3.4 billion yen of negative free cash flow in the past year. That means it’s on the risky side of things. There is no doubt that we learn the most about debt from the balance sheet. But at the end of the day, every business can contain risks that exist off the balance sheet. Concrete example: we have spotted 3 warning signs for Inox Wind you should be aware of, and 2 of them are a bit of a concern.
At the end of the day, it’s often best to focus on businesses with no net debt. You can access our special list of these companies (all with a history of profit growth). It’s free.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in the mentioned stocks.
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