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. We can see that Garware Technical Fibres Limited (NSE:GARFIBRES) does use debt in its business. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Garware Technical Fibres

How Much Debt Does Garware Technical Fibres Carry?

You can click the graphic below for the historical numbers, but it shows that Garware Technical Fibres had ₹1.23b of debt in March 2024, down from ₹1.34b, one year before. But it also has ₹3.13b in cash to offset that, meaning it has ₹1.90b net cash.

A Look At Garware Technical Fibres' Liabilities

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 ₹2.63b worth of receivables due within a year. So it can boast ₹388.9m 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 it's very unlikely that the ₹73.8b company is short on cash, but still worth keeping an eye on the 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.

And we also note warmly that Garware Technical Fibres grew its EBIT by 12% last year, making its debt load easier to handle. 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'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. 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 63% 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 ₹1.90b in net cash and a decent-looking balance sheet. 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.

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.