These 4 measures indicate that NTPC (NSE: NTPC) uses debt in a risky way


Howard Marks put it well when he said that, rather than worrying about stock price volatility, “the possibility of permanent loss is the risk I worry about … and every investor practice that I know is worried. When we think about how risky a business is, we always like to look at its use of debt, because overloading debt can lead to bankruptcy. Like many other companies NTPC limited (NSE: NTPC) uses debt. But the most important question is: what risk does this debt create?

When is Debt a Problem?

Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, then it exists at their mercy. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are ruthlessly liquidated by their bankers. However, a more common (but still painful) scenario is that he has to raise new equity at low cost, thereby constantly diluting shareholders. Of course, many companies use debt to finance their growth without negative consequences. When we think of a business’s use of debt, we first look at cash flow and debt together.

See our latest analysis for NTPC

What is the debt of NTPC?

You can click on the graph below for historical figures, but it shows that as of September 2021, NTPC had 2.08t of debt, an increase from 1.97t, year on year. On the other hand, it has 100.0 billion yen in cash, resulting in net debt of around 1.98 tons of yen.

History of debt to equity NSEI: NTPC December 4, 2021

How strong is NTPC’s balance sheet?

According to the latest published balance sheet, the NTPC had a liability of 690.1b yen due within 12 months and a liability of 2.06t yen due beyond 12 months. In compensation for these obligations, he had cash of 100.0 billion yen as well as receivables valued at 189.0 billion yen due within 12 months. Thus, its liabilities exceed the sum of its cash and its (short-term) receivables by 2.46 t.

This deficit casts a shadow over the 1.23 ton yen company like a towering colossus of mere mortals. We therefore believe that shareholders should monitor it closely. After all, NTPC would likely need a major recapitalization if it were to pay its creditors today.

We measure a company’s indebtedness relative to its earning power by looking at its net debt divided by its earnings before interest, taxes, depreciation, and amortization (EBITDA) and calculating the ease with which its earnings before interest and taxes (EBIT ) covers its interests. costs (interest coverage). The advantage of this approach is that we take into account both the absolute amount of debt (with net debt versus EBITDA) and the actual interest charges associated with this debt (with its coverage rate). interests).

Low interest coverage of 2.2 times and an unusually high Net Debt to EBITDA ratio of 5.8 hit our confidence in NTPC like a punch in the gut. The debt burden here is considerable. Even more troubling is the fact that NTPC actually allowed its EBIT to decline 9.8% over the past year. If this profit trend continues, the company will face an uphill battle to repay its debt. There is no doubt that we learn the most about debt from the balance sheet. But ultimately, the company’s future profitability will decide whether NTPC can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free Analyst Profit Forecast report interesting.

Finally, while the IRS may love accounting profits, lenders only accept hard cash. It is therefore worth checking to what extent this EBIT is supported by free cash flow. Over the past three years, NTPC has recorded free cash flow of 31% of its EBIT, which is lower than expected. It’s not great when it comes to paying down debt.

Our point of view

At first glance, NTPC’s net debt to EBITDA left us hesitant about the stock, and its total liability level was no more appealing than the single empty restaurant on the busiest night of the month. year. And even its EBIT growth rate doesn’t inspire much confidence. Considering all of the aforementioned factors, it seems that NTPC has too much debt. This kind of risk is acceptable to some, but it certainly does not float our boat. 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. For example, we have identified 2 warning signs for NTPC (1 is concerning) you should be aware of.

If you want to invest in companies that can generate profits without the burden of debt, check out this free list of growing companies that have net cash on the balance sheet.

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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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