Garware Technical Fibres (NSE:GARFIBRES) Has A Rock Solid Balance Sheet

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. Importantly, Garware Technical Fibres Limited (NSE:GARFIBRES) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. 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

What Is Garware Technical Fibres's Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Garware Technical Fibres had debt of ₹1.42b, up from ₹1.16b in one year. But on the other hand it also has ₹1.62b in cash, leading to a ₹199.9m 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 ₹4.91b due within 12 months and liabilities of ₹575.6m due beyond that. On the other hand, it had cash of ₹1.62b and ₹2.52b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹1.34b.

This state of affairs indicates that Garware Technical Fibres' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the ₹81.5b company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, Garware Technical Fibres also has more cash than debt, so we're pretty confident it can manage its debt safely.

Also positive, Garware Technical Fibres grew its EBIT by 23% in the last year, and that should make it easier to pay down debt, going forward. 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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 61% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

We could understand if investors are concerned about Garware Technical Fibres's liabilities, but we can be reassured by the fact it has has net cash of ₹199.9m. And we liked the look of last year's 23% year-on-year EBIT growth. So is Garware Technical Fibres's debt a risk? It doesn't seem so to us. 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. For example, we've discovered 1 warning sign for Garware Technical Fibres that you should be aware of before investing here.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.