Does Garden Reach Shipbuilders & Engineers (NSE:GRSE) 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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Garden Reach Shipbuilders & Engineers Limited (NSE:GRSE) makes use of debt. But is this debt a concern to shareholders?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Garden Reach Shipbuilders & Engineers

How Much Debt Does Garden Reach Shipbuilders & Engineers Carry?

As you can see below, at the end of March 2023, Garden Reach Shipbuilders & Engineers had ₹3.01b of debt, up from none a year ago. Click the image for more detail. However, it does have ₹45.6b in cash offsetting this, leading to net cash of ₹42.6b.

How Healthy Is Garden Reach Shipbuilders & Engineers' Balance Sheet?

The latest balance sheet data shows that Garden Reach Shipbuilders & Engineers had liabilities of ₹92.4b due within a year, and liabilities of ₹1.21b falling due after that. Offsetting these obligations, it had cash of ₹45.6b as well as receivables valued at ₹508.5m due within 12 months. So it has liabilities totalling ₹47.5b more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of ₹58.2b. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. Despite its noteworthy liabilities, Garden Reach Shipbuilders & Engineers boasts net cash, so it's fair to say it does not have a heavy debt load!

Fortunately, Garden Reach Shipbuilders & Engineers grew its EBIT by 3.6% in the last year, making that debt load look even more manageable. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Garden Reach Shipbuilders & Engineers'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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Garden Reach Shipbuilders & Engineers 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 last three years, Garden Reach Shipbuilders & Engineers actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

Although Garden Reach Shipbuilders & Engineers's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of ₹42.6b. And it impressed us with free cash flow of ₹14b, being 518% of its EBIT. So we are not troubled with Garden Reach Shipbuilders & Engineers's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Garden Reach Shipbuilders & Engineers you should know about.

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.