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David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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 Bharat Bijlee Limited (NSE:BBL) does use debt in its business. But the more important question is: how much risk is that debt creating?
Why Does Debt Bring Risk?
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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.
See our latest analysis for Bharat Bijlee
How Much Debt Does Bharat Bijlee Carry?
You can click the graphic below for the historical numbers, but it shows that Bharat Bijlee had ₹1.99b of debt in March 2019, down from ₹2.15b, one year before. However, it also had ₹480.8m in cash, and so its net debt is ₹1.51b.
How Strong Is Bharat Bijlee's Balance Sheet?
According to the last reported balance sheet, Bharat Bijlee had liabilities of ₹3.95b due within 12 months, and liabilities of ₹11.5m due beyond 12 months. On the other hand, it had cash of ₹480.8m and ₹4.68b worth of receivables due within a year. So it actually has ₹1.20b more liquid assets than total liabilities.
This excess liquidity suggests that Bharat Bijlee is taking a careful approach to debt. Because it has plenty of assets, it is unlikely to have trouble with its lenders.
We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.
Bharat Bijlee has a debt to EBITDA ratio of 2.6 and its EBIT covered its interest expense 3.0 times. Taken together this implies that, while we wouldn't want to see debt levels rise, we think it can handle its current leverage. One way Bharat Bijlee could vanquish its debt would be if it stops borrowing more but conitinues to grow EBIT at around 13%, as it did over the last year. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Bharat Bijlee will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.