We Think Goldiam International (NSE:GOLDIAM) Can Stay On Top Of Its Debt

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.' 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. Importantly, Goldiam International Limited (NSE:GOLDIAM) does carry debt. But the more important question is: how much risk is that debt creating?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Goldiam International

What Is Goldiam International's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2021 Goldiam International had debt of ₹582.6m, up from ₹48.3m in one year. However, its balance sheet shows it holds ₹2.13b in cash, so it actually has ₹1.55b net cash.

How Healthy Is Goldiam International's Balance Sheet?

According to the last reported balance sheet, Goldiam International had liabilities of ₹1.80b due within 12 months, and liabilities of ₹25.9m due beyond 12 months. Offsetting these obligations, it had cash of ₹2.13b as well as receivables valued at ₹2.24b due within 12 months. So it actually has ₹2.54b more liquid assets than total liabilities.

This surplus suggests that Goldiam International has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Goldiam International has more cash than debt is arguably a good indication that it can manage its debt safely.

Even more impressive was the fact that Goldiam International grew its EBIT by 173% over twelve months. That boost will make it even easier to pay down debt going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Goldiam International will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Goldiam International 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. In the last three years, Goldiam International created free cash flow amounting to 13% of its EBIT, an uninspiring performance. That limp level of cash conversion undermines its ability to manage and pay down debt.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Goldiam International has net cash of ₹1.55b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 173% over the last year. So is Goldiam International'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. Case in point: We've spotted 2 warning signs for Goldiam International you should be aware of, and 1 of them doesn't sit too well with us.

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.