Ganesha Ecosphere (NSE:GANECOS) Has A Pretty Healthy Balance Sheet

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. As with many other companies Ganesha Ecosphere Limited (NSE:GANECOS) makes use of debt. But should shareholders be worried about its use of debt?

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. 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. 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.

See our latest analysis for Ganesha Ecosphere

What Is Ganesha Ecosphere's Net Debt?

As you can see below, at the end of September 2020, Ganesha Ecosphere had ₹1.13b of debt, up from ₹707.3m a year ago. Click the image for more detail. However, it does have ₹1.23b in cash offsetting this, leading to net cash of ₹97.9m.

A Look At Ganesha Ecosphere's Liabilities

We can see from the most recent balance sheet that Ganesha Ecosphere had liabilities of ₹1.50b falling due within a year, and liabilities of ₹758.6m due beyond that. On the other hand, it had cash of ₹1.23b and ₹1.09b worth of receivables due within a year. So it actually has ₹71.9m more liquid assets than total liabilities.

This state of affairs indicates that Ganesha Ecosphere's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the ₹13.6b company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that Ganesha Ecosphere has more cash than debt is arguably a good indication that it can manage its debt safely.

It is just as well that Ganesha Ecosphere's load is not too heavy, because its EBIT was down 63% over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Ganesha Ecosphere's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Ganesha Ecosphere 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. In the last three years, Ganesha Ecosphere's free cash flow amounted to 42% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing up

While it is always sensible to investigate a company's debt, in this case Ganesha Ecosphere has ₹97.9m in net cash and a decent-looking balance sheet. So we are not troubled with Ganesha Ecosphere's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Ganesha Ecosphere you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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