Is Garware Technical Fibres (NSE:GARFIBRES) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Garware Technical Fibres Limited (NSE:GARFIBRES) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. 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 Net Debt?

As you can see below, Garware Technical Fibres had ₹1.54b of debt, at September 2020, which is about the same as the year before. You can click the chart for greater detail. But it also has ₹3.31b in cash to offset that, meaning it has ₹1.77b net cash.

How Strong Is Garware Technical Fibres' Balance Sheet?

We can see from the most recent balance sheet that Garware Technical Fibres had liabilities of ₹4.48b falling due within a year, and liabilities of ₹452.3m due beyond that. Offsetting this, it had ₹3.31b in cash and ₹2.20b in receivables that were due within 12 months. So it actually has ₹573.3m more liquid assets than total liabilities.

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 ₹49.6b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, Garware Technical Fibres boasts net cash, so it's fair to say it does not have a heavy debt load!

The good news is that Garware Technical Fibres has increased its EBIT by 4.5% over twelve months, which should ease any concerns about debt repayment. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Garware Technical Fibres can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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 71% 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 ₹1.77b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 71% of that EBIT to free cash flow, bringing in ₹1.4b. So we don't think Garware Technical Fibres's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Garware Technical Fibres is showing 1 warning sign in our investment analysis , you should know about...

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. 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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