Does Grindwell Norton (NSE:GRINDWELL) Have A Healthy Balance Sheet?

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. Importantly, Grindwell Norton Limited (NSE:GRINDWELL) does carry debt. 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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Grindwell Norton

How Much Debt Does Grindwell Norton Carry?

As you can see below, at the end of March 2023, Grindwell Norton had ₹175.4m of debt, up from ₹21.5m a year ago. Click the image for more detail. However, its balance sheet shows it holds ₹5.72b in cash, so it actually has ₹5.55b net cash.

How Strong Is Grindwell Norton's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Grindwell Norton had liabilities of ₹5.16b due within 12 months and liabilities of ₹792.5m due beyond that. Offsetting this, it had ₹5.72b in cash and ₹2.84b in receivables that were due within 12 months. So it actually has ₹2.61b more liquid assets than total liabilities.

This state of affairs indicates that Grindwell Norton's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the ₹246.5b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, Grindwell Norton boasts net cash, so it's fair to say it does not have a heavy debt load!

Also positive, Grindwell Norton grew its EBIT by 30% in the last year, and that should make it easier to pay down debt, going forward. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Grindwell Norton's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Grindwell Norton 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. Over the most recent three years, Grindwell Norton recorded free cash flow worth 50% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While it is always sensible to investigate a company's debt, in this case Grindwell Norton has ₹5.55b in net cash and a decent-looking balance sheet. And we liked the look of last year's 30% year-on-year EBIT growth. So we don't think Grindwell Norton's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in Grindwell Norton, you may well want to click here to check an interactive graph of its earnings per share history.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.