These 4 Measures Indicate That Graphite India (NSE:GRAPHITE) Is Using Debt Extensively

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. We note that Graphite India Limited (NSE:GRAPHITE) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Graphite India

What Is Graphite India's Debt?

As you can see below, Graphite India had ₹4.32b of debt, at March 2023, which is about the same as the year before. You can click the chart for greater detail. But it also has ₹14.3b in cash to offset that, meaning it has ₹9.96b net cash.

A Look At Graphite India's Liabilities

The latest balance sheet data shows that Graphite India had liabilities of ₹14.2b due within a year, and liabilities of ₹1.26b falling due after that. Offsetting these obligations, it had cash of ₹14.3b as well as receivables valued at ₹5.71b due within 12 months. So it can boast ₹4.53b more liquid assets than total liabilities.

This short term liquidity is a sign that Graphite India could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Graphite India boasts net cash, so it's fair to say it does not have a heavy debt load!

The modesty of its debt load may become crucial for Graphite India if management cannot prevent a repeat of the 57% cut to EBIT over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. 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 Graphite India can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Graphite 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, Graphite India burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While it is always sensible to investigate a company's debt, in this case Graphite India has ₹9.96b in net cash and a decent-looking balance sheet. So while Graphite India does not have a great balance sheet, it's certainly not too bad. 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. For example - Graphite India has 2 warning signs we think you should be aware of.

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. 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 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.