Grindwell Norton (NSE:GRINDWELL) Has A Pretty Healthy Balance Sheet

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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 Grindwell Norton Limited (NSE:GRINDWELL) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Grindwell Norton

What Is Grindwell Norton's Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Grindwell Norton had ₹826.0m of debt, an increase on ₹513.6m, over one year. But on the other hand it also has ₹6.58b in cash, leading to a ₹5.76b net cash position.

A Look At Grindwell Norton's Liabilities

We can see from the most recent balance sheet that Grindwell Norton had liabilities of ₹5.70b falling due within a year, and liabilities of ₹1.32b due beyond that. Offsetting these obligations, it had cash of ₹6.58b as well as receivables valued at ₹3.60b due within 12 months. So it actually has ₹3.15b more liquid assets than total liabilities.

Having regard to Grindwell Norton's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the ₹267.6b 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!

On the other hand, Grindwell Norton saw its EBIT drop by 2.5% in the last twelve months. That sort of decline, if sustained, will obviously make debt harder to handle. 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're focused on the future you can check out this free report showing analyst profit forecasts.

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. Looking at the most recent three years, Grindwell Norton recorded free cash flow of 39% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Grindwell Norton has net cash of ₹5.76b, as well as more liquid assets than liabilities. So we are not troubled with Grindwell Norton's debt use. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 1 warning sign for Grindwell Norton that 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.