Howard Marks put it nicely when he said that, rather than worrying about share price volatility, ‘The possibility of permanent loss is the risk I worry about… and every practical investor I know worries about.’ When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Coal India Limited (NSE:COALINDIA) makes use of debt. But the real question is whether this debt is making the company risky.
When Is Debt A Problem?
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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
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What Is Coal India’s Debt?
You can click the graphic below for the historical numbers, but it shows that as of March 2023 Coal India had ₹41.1b of debt, an increase on ₹33.1b, over one year. But on the other hand it also has ₹439.8b in cash, leading to a ₹398.6b net cash position.
A Look At Coal India’s Liabilities
The latest balance sheet data shows that Coal India had liabilities of ₹687.3b due within a year, and liabilities of ₹844.6b falling due after that. Offsetting this, it had ₹439.8b in cash and ₹218.0b in receivables that were due within 12 months. So it has liabilities totalling ₹874.1b more than its cash and near-term receivables, combined.
Coal India has a very large market capitalization of ₹1.49t, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. Despite its noteworthy liabilities, Coal India boasts net cash, so it’s fair to say it does not have a heavy debt load!
On top of that, Coal India grew its EBIT by 58% over the last twelve months, and that growth will make it easier to handle its debt. There’s no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Coal India can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. Coal India may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, Coal India produced sturdy free cash flow equating to 73% 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.
Summing Up
Although Coal India’s balance sheet isn’t particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of ₹398.6b. And we liked the look of last year’s 58% year-on-year EBIT growth. So is Coal India’s debt a risk? It doesn’t seem so to us. There’s no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet – far from it. To that end, you should learn about the 3 warning signs we’ve spotted with Coal India (including 2 which make us uncomfortable) .
When all is said and done, sometimes its easier to focus on companies that don’t even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any…
Read More: Coal India (NSE:COALINDIA) Has A Pretty Healthy Balance Sheet