We believe Thermax (NSE: THERMAX) can manage its debt with ease


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Berkshire Hathaway’s Charlie Munger-backed external fund manager Li Lu is quick to say this when he says “The biggest risk in investing is not price volatility, but if you will suffer a loss. permanent 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. Above all, Thermax Limited (NSE: THERMAX) is in debt. But the real question is whether this debt makes the business risky.

What risk does debt entail?

Debts and other liabilities become risky for a business when it cannot easily meet these obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. 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. By replacing dilution, however, debt can be a very good tool for companies that need capital to invest in growth at high rates of return. The first step in examining a business’s debt levels is to consider its cash flow and debt together.

Discover our latest analysis for Thermax

What is Thermax’s debt?

As you can see below, at the end of September 2021, Thermax had 2.99 billion yen in debt, up from 2.45 billion yen a year ago. Click on the image for more details. But it also has 18.1 billion yen in cash to make up for that, which means it has 15.1 billion yen in net cash.

NSEI: THERMAX History of debt to equity December 25, 2021

How healthy is Thermax’s balance sheet?

We can see from the most recent balance sheet that Thermax had liabilities of 31.6 billion yen maturing within one year and liabilities of 1.78 billion yen beyond. In compensation for these obligations, he had cash of 18.1 billion yen as well as receivables valued at 10.3 billion yen due within 12 months. Thus, its liabilities exceed the sum of its cash and (short-term) receivables by 5.05 b.

Considering that Thermax has a market capitalization of 197.5 billion yen, it’s hard to believe that these liabilities pose a significant threat. Having said that, it is clear that we must continue to monitor his record lest it get worse. While he has some liabilities to note, Thermax also has more cash than debt, so we’re pretty confident he can handle his debt safely.

Best of all, Thermax increased its EBIT by 187% last year, which is an impressive improvement. This boost will make it even easier to pay off debt in the future. There is no doubt that we learn the most about debt from the balance sheet. But it is future profits, more than anything, that will determine Thermax’s ability to maintain a healthy balance sheet in the future. So, if you want to see what the professionals think, you might find this free Analyst Profit Forecast report interesting.

Finally, a business needs free cash flow to pay off debts; accounting profits are not enough. Thermax may have net cash on the balance sheet, but it’s always interesting to see how well the business converts its earnings before interest and taxes (EBIT) into free cash flow, as this will influence both its need and its ability to manage debt. Fortunately for all shareholders, Thermax has actually generated more free cash flow than EBIT over the past three years. This kind of solid silver generation warms our hearts like a puppy in a bumblebee costume.

In summary

While it always makes sense to look at a company’s total liabilities, it is very reassuring that Thermax has 15.1 billion yen in net cash. The icing on the cake is that he converted 120% of that EBIT into free cash flow, bringing in 4.9 billion euros. We therefore do not believe that Thermax’s use of debt is risky. On top of most other metrics, we think it’s important to track how quickly earnings per share are growing, if at all. If you have understood this as well, you are in luck because today you can check out this interactive graph of historical Thermax earnings per share for free.

At the end of the day, sometimes it’s easier to focus on businesses that don’t even need to go into debt. Readers can access a list of growth stocks with zero net debt 100% free, at present.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock 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 documents. Simply Wall St has no position in any of the stocks mentioned.

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