The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Indowind Energy Limited (NSE:INDOWIND) does carry debt. But should shareholders be worried about its use of debt?
What Risk Does Debt Bring?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is Indowind Energy's Net Debt?
The chart below, which you can click on for greater detail, shows that Indowind Energy had ₹1.01b in debt in March 2019; about the same as the year before. However, because it has a cash reserve of ₹68.8m, its net debt is less, at about ₹945.2m.
A Look At Indowind Energy's Liabilities
According to the last reported balance sheet, Indowind Energy had liabilities of ₹98.0m due within 12 months, and liabilities of ₹921.7m due beyond 12 months. Offsetting this, it had ₹68.8m in cash and ₹57.8m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹893.1m.
This deficit casts a shadow over the ₹310.5m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt At the end of the day, Indowind Energy would probably need a major re-capitalization if its creditors were to demand repayment. There's no doubt that we learn most about debt from the balance sheet. But it is Indowind Energy's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.
Over 12 months, Indowind Energy saw its revenue hold pretty steady. While that hardly impresses, its not too bad either.
Over the last twelve months Indowind Energy produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping ₹32m. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. Of course, it may be able to improve its situation with a bit of luck and good execution. Nevertheless, we would not bet on it given that it lost ₹123m in just last twelve months, and it doesn't have much by way of liquid assets. So we think this stock is quite risky, like eating chicken you think might look too pink. We'd prefer pass. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how Indowind Energy's profit, revenue, and operating cashflow have changed over the last few years.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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