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Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. As with many other companies SJVN Limited (NSE:SJVN) makes use of debt. But the more important question is: how much risk is that debt creating?
When Is Debt Dangerous?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. When we examine debt levels, we first consider both cash and debt levels, together.
View our latest analysis for SJVN
What Is SJVN's Debt?
As you can see below, SJVN had ₹19.4b of debt at March 2019, down from ₹22.3b a year prior. But on the other hand it also has ₹38.3b in cash, leading to a ₹18.9b net cash position.
How Strong Is SJVN's Balance Sheet?
The latest balance sheet data shows that SJVN had liabilities of ₹9.00b due within a year, and liabilities of ₹28.3b falling due after that. Offsetting these obligations, it had cash of ₹38.3b as well as receivables valued at ₹11.6b due within 12 months. So it actually has ₹12.6b more liquid assets than total liabilities.
This short term liquidity is a sign that SJVN could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that SJVN has more cash than debt is arguably a good indication that it can manage its debt safely.
Also positive, SJVN grew its EBIT by 24% in the last year, and that should make it easier to pay down debt, going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine SJVN's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While SJVN has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, SJVN produced sturdy free cash flow equating to 63% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.