We Think Garware Technical Fibres (NSE:GARFIBRES) Can Manage Its Debt With Ease

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.' 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 should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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. 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?

As you can see below, Garware Technical Fibres had ₹795.7m of debt at March 2022, down from ₹1.02b a year prior. However, its balance sheet shows it holds ₹2.23b in cash, so it actually has ₹1.44b net cash.

How Healthy Is Garware Technical Fibres' Balance Sheet?

We can see from the most recent balance sheet that Garware Technical Fibres had liabilities of ₹3.97b falling due within a year, and liabilities of ₹474.0m due beyond that. Offsetting these obligations, it had cash of ₹2.23b as well as receivables valued at ₹2.60b due within 12 months. So it actually has ₹385.0m 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 ₹62.4b 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!

And we also note warmly that Garware Technical Fibres grew its EBIT by 16% last year, making its debt load easier to handle. When analysing debt levels, the balance sheet is the obvious place to start. 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, while the tax-man may adore accounting profits, lenders only accept 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 63% 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 it is always sensible to investigate a company's debt, in this case Garware Technical Fibres has ₹1.44b in net cash and a decent-looking balance sheet. And we liked the look of last year's 16% year-on-year EBIT growth. So is Garware Technical Fibres's debt a risk? It doesn't seem so to us. Over time, share prices tend to follow earnings per share, so if you're interested in Garware Technical Fibres, you may well want to click here to check an interactive graph of its earnings per share history.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.