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

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Garware Technical Fibres Limited (NSE:GARFIBRES) makes use of 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Garware Technical Fibres

What Is Garware Technical Fibres's Debt?

The image below, which you can click on for greater detail, shows that Garware Technical Fibres had debt of ₹1.19b at the end of March 2024, a reduction from ₹1.33b over a year. However, it does have ₹3.13b in cash offsetting this, leading to net cash of ₹1.94b.

How Healthy Is Garware Technical Fibres' Balance Sheet?

The latest balance sheet data shows that Garware Technical Fibres had liabilities of ₹4.83b due within a year, and liabilities of ₹540.5m falling due after that. On the other hand, it had cash of ₹3.13b and ₹2.68b worth of receivables due within a year. So it can boast ₹437.1m 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 ₹69.5b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Garware Technical Fibres boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Garware Technical Fibres has boosted its EBIT by 48%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Garware Technical Fibres 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Garware Technical Fibres 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. During the last three years, Garware Technical Fibres produced sturdy free cash flow equating to 58% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While it is always sensible to investigate a company's debt, in this case Garware Technical Fibres has ₹1.94b in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 48% over the last year. 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, 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.