Grindwell Norton (NSE:GRINDWELL) Could Easily Take On More Debt

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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 can see that Grindwell Norton Limited (NSE:GRINDWELL) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Grindwell Norton

What Is Grindwell Norton's Net Debt?

The image below, which you can click on for greater detail, shows that at March 2023 Grindwell Norton had debt of ₹175.4m, up from ₹21.5m in one year. However, it does have ₹5.74b in cash offsetting this, leading to net cash of ₹5.57b.

How Healthy 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 these obligations, it had cash of ₹5.74b as well as receivables valued at ₹2.81b 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 ₹220.3b company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that Grindwell Norton has more cash than debt is arguably a good indication that it can manage its debt safely.

Another good sign is that Grindwell Norton has been able to increase its EBIT by 27% in twelve months, making it easier to pay down debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Grindwell Norton can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Grindwell Norton has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the most recent three years, Grindwell Norton recorded free cash flow worth 51% 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 ₹5.57b in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 27% over the last year. So is Grindwell Norton's debt a risk? It doesn't seem so to us. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Grindwell Norton's earnings per share history for free.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.