Are Sterling and Wilson Solar (NSE: SWSOLAR) Using Debt Wisely?

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David Iben expressed it well when he said: “Volatility is not a risk that is close to our hearts. What matters to us is to avoid the permanent loss of capital. ‘ So it seems like smart money knows that debt – which is usually involved in bankruptcies – is a very important factor, when you assess the level of risk of a business. We can see that Sterling and Wilson Solar Limited (NSE: SWSOLAR) uses debt in its activities. But should shareholders be worried about its use of debt?

When is debt dangerous?

Debt helps a business until the business struggles to repay it, either with new capital or with free cash flow. In the worst case scenario, a business can go bankrupt if it cannot pay its creditors. While it’s not too common, we often see indebted companies continually diluting their shareholders because lenders are forcing them to raise capital at a ridiculous price. Of course, the advantage of debt is that it often represents cheap capital, especially when it replaces dilution in a business with the ability to reinvest at high rates of return. When we look at debt levels, we first look at cash and debt levels together.

See our latest analysis for Sterling and Wilson Solar

How much debt do Sterling and Wilson Solar carry?

The image below, which you can click for more details, shows Sterling and Wilson Solar owed 4.68 billion yen in debt at the end of March 2021, a reduction from 12.2 billion yen on a year. However, his balance sheet shows that he has 4.99 billion yen in cash, so he actually has 304.9 million yen in net cash.

NSEI: SWSOLAR History of debt to equity July 1, 2021

A look at the responsibilities of Sterling and Wilson Solar

We can see from the most recent balance sheet that Sterling and Wilson Solar had liabilities of 30.2 billion yen maturing within one year and liabilities of 352.3 million yen beyond. In compensation for these obligations, he had cash of 4.99 billion yen as well as receivables valued at 17.5 billion yen within 12 months. Thus, its liabilities exceed the sum of its cash and its (short-term) receivables by € 7.98 billion.

Of course, Sterling and Wilson Solar have a market cap of 43.6 billion yen, so those liabilities are likely manageable. But there are enough liabilities that we would certainly recommend that shareholders continue to monitor the balance sheet going forward. While he has some liabilities to note, Sterling and Wilson Solar also have more cash than debt, so we’re pretty confident that he can handle his debt safely. There is no doubt that we learn the most about debt from the balance sheet. But it is the earnings of Sterling and Wilson Solar that will influence the performance of the balance sheet going forward. So, when considering debt, it is really worth looking at the profit trend. Click here for an interactive snapshot.

Over the past year, Sterling and Wilson Solar have recorded a loss before interest and taxes and have actually cut revenue by 6.1% to £ 52bn. This is not what we hope to see.

So how risky are Sterling and Wilson Solar?

Although Sterling and Wilson Solar recorded a loss of earnings before interest and taxes (EBIT) over the past twelve months, this generated positive free cash flow of 1.8 billion yen. So, although it is in deficit, it does not appear to have too much short-term balance sheet risk, given the net cash position. Until we see positive EBIT, we remain a bit cautious about the stock, especially given the rather modest revenue growth. There is no doubt that we learn the most about debt from the balance sheet. But at the end of the day, every business can contain risks that exist off the balance sheet. To this end, you should inquire about the 4 warning signs we spotted with Sterling and Wilson Solar (including 1 essential).

Of course, if you are the type of investor who prefers to buy stocks without going into debt, feel free to check out our exclusive list of cash growth stocks today.

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This Simply Wall St article is general in nature. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative material. Simply Wall St has no position in any of the stocks mentioned.
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