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 Gati Limited (NSE:GATI) makes use of debt. But the more important question is: how much risk is that debt creating?
What Risk Does Debt Bring?
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. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.
See our latest analysis for Gati
How Much Debt Does Gati Carry?
As you can see below, Gati had ₹2.51b of debt at March 2020, down from ₹3.51b a year prior. However, it does have ₹1.56b in cash offsetting this, leading to net debt of about ₹952.3m.
How Healthy Is Gati's Balance Sheet?
We can see from the most recent balance sheet that Gati had liabilities of ₹5.72b falling due within a year, and liabilities of ₹1.75b due beyond that. Offsetting these obligations, it had cash of ₹1.56b as well as receivables valued at ₹2.27b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹3.7b.
This is a mountain of leverage relative to its market capitalization of ₹5.21b. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. There's no doubt that we learn most about debt from the balance sheet. But it is Gati's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.
Over 12 months, Gati made a loss at the EBIT level, and saw its revenue drop to ₹17b, which is a fall of 8.1%. That's not what we would hope to see.
Caveat Emptor
Over the last twelve months Gati produced an earnings before interest and tax (EBIT) loss. Indeed, it lost ₹4.5m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through ₹41.1m of cash over the last year. So to be blunt we think it is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 4 warning signs for Gati (1 is significant!) that you should be aware of before investing here.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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About NSEI:ACLGATI
Excellent balance sheet with questionable track record.
