Garden Reach Shipbuilders & Engineers (NSE:GRSE) Seems To Use Debt Rather Sparingly

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.' 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 should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its 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, Garden Reach Shipbuilders & Engineers had ₹555.8m of debt at March 2024, down from ₹3.01b a year prior. However, it does have ₹37.2b in cash offsetting this, leading to net cash of ₹36.6b.

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

The latest balance sheet data shows that Garden Reach Shipbuilders & Engineers had liabilities of ₹84.6b due within a year, and liabilities of ₹1.22b falling due after that. On the other hand, it had cash of ₹37.2b and ₹1.94b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹46.6b.

Of course, Garden Reach Shipbuilders & Engineers has a market capitalization of ₹279.6b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. 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!

On top of that, Garden Reach Shipbuilders & Engineers grew its EBIT by 69% over the last twelve months, and that growth will make it easier to handle its 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 Garden Reach Shipbuilders & Engineers 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. 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 most recent three years, Garden Reach Shipbuilders & Engineers recorded free cash flow worth 59% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While Garden Reach Shipbuilders & Engineers does have more liabilities than liquid assets, it also has net cash of ₹36.6b. And we liked the look of last year's 69% year-on-year EBIT growth. So is Garden Reach Shipbuilders & Engineers's debt a risk? It doesn't seem so to us. 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. Case in point: We've spotted 2 warning signs for Garden Reach Shipbuilders & Engineers you should be aware of, and 1 of them doesn't sit too well with us.

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.

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