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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 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. We can see that Genus Power Infrastructures Limited (NSE:GENUSPOWER) does use debt in its business. But is this debt a concern to shareholders?
What Risk Does Debt Bring?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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. When we examine debt levels, we first consider both cash and debt levels, together.
Check out our latest analysis for Genus Power Infrastructures
What Is Genus Power Infrastructures's Net Debt?
As you can see below, at the end of March 2019, Genus Power Infrastructures had ₹2.67b of debt, up from ₹2.40b a year ago. Click the image for more detail. However, because it has a cash reserve of ₹1.98b, its net debt is less, at about ₹691.0m.
A Look At Genus Power Infrastructures's Liabilities
According to the last reported balance sheet, Genus Power Infrastructures had liabilities of ₹5.32b due within 12 months, and liabilities of ₹603.2m due beyond 12 months. On the other hand, it had cash of ₹1.98b and ₹5.81b worth of receivables due within a year. So it can boast ₹1.87b more liquid assets than total liabilities.
This surplus liquidity suggests that Genus Power Infrastructures's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. On this basis we think its balance sheet is strong like a sleek panther or even a proud lion.
We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.