Garware Technical Fibres (NSE:GARFIBRES) Could Easily Take On More Debt

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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. Importantly, Garware Technical Fibres Limited (NSE:GARFIBRES) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Garware Technical Fibres

What Is Garware Technical Fibres's Debt?

You can click the graphic below for the historical numbers, but it shows that Garware Technical Fibres had ₹1.02b of debt in March 2021, down from ₹1.33b, one year before. But on the other hand it also has ₹3.03b in cash, leading to a ₹2.01b net cash position.

How Healthy Is Garware Technical Fibres' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Garware Technical Fibres had liabilities of ₹4.60b due within 12 months and liabilities of ₹479.6m due beyond that. On the other hand, it had cash of ₹3.03b and ₹2.47b worth of receivables due within a year. So it actually has ₹423.1m more liquid assets than total liabilities.

Having regard to Garware Technical Fibres' size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the ₹67.0b company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that Garware Technical Fibres has more cash than debt is arguably a good indication that it can manage its debt safely.

Also positive, Garware Technical Fibres grew its EBIT by 29% in the last year, and that should make it easier to pay down debt, going forward. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Garware Technical Fibres's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Garware Technical Fibres 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. During the last three years, Garware Technical Fibres produced sturdy free cash flow equating to 79% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Garware Technical Fibres has net cash of ₹2.01b, as well as more liquid assets than liabilities. And we liked the look of last year's 29% year-on-year EBIT growth. So is Garware Technical Fibres'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 Garware Technical Fibres's earnings per share history for free.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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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