Does Great Eastern Shipping (NSE:GESHIP) Have A Healthy 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.' 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. As with many other companies The Great Eastern Shipping Company Limited (NSE:GESHIP) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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, 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 think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Great Eastern Shipping

What Is Great Eastern Shipping's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Great Eastern Shipping had ₹42.0b of debt in September 2022, down from ₹47.9b, one year before. However, its balance sheet shows it holds ₹49.7b in cash, so it actually has ₹7.69b net cash.

A Look At Great Eastern Shipping's Liabilities

According to the last reported balance sheet, Great Eastern Shipping had liabilities of ₹16.2b due within 12 months, and liabilities of ₹42.4b due beyond 12 months. Offsetting these obligations, it had cash of ₹49.7b as well as receivables valued at ₹5.60b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹3.26b.

Since publicly traded Great Eastern Shipping shares are worth a total of ₹102.4b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Great Eastern Shipping also has more cash than debt, so we're pretty confident it can manage its debt safely.

Pleasingly, Great Eastern Shipping is growing its EBIT faster than former Australian PM Bob Hawke downs a yard glass, boasting a 109% gain in the last twelve months. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Great Eastern Shipping's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Great Eastern Shipping 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. Over the last three years, Great Eastern Shipping actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

We could understand if investors are concerned about Great Eastern Shipping's liabilities, but we can be reassured by the fact it has has net cash of ₹7.69b. And it impressed us with free cash flow of ₹18b, being 108% of its EBIT. So is Great Eastern Shipping's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 1 warning sign for Great Eastern Shipping you should be aware of.

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.