Great Eastern Shipping (NSE:GESHIP) Could Easily Take On More Debt

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 can see that The Great Eastern Shipping Company Limited (NSE:GESHIP) does use debt in its business. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Great Eastern Shipping

What Is Great Eastern Shipping's Net Debt?

As you can see below, Great Eastern Shipping had ₹36.2b of debt at March 2023, down from ₹46.3b a year prior. But on the other hand it also has ₹53.1b in cash, leading to a ₹16.9b net cash position.

A Look At Great Eastern Shipping's Liabilities

Zooming in on the latest balance sheet data, we can see that Great Eastern Shipping had liabilities of ₹14.4b due within 12 months and liabilities of ₹35.0b due beyond that. Offsetting this, it had ₹53.1b in cash and ₹5.77b in receivables that were due within 12 months. So it actually has ₹9.52b more liquid assets than total liabilities.

This surplus suggests that Great Eastern Shipping has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Great Eastern Shipping boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, Great Eastern Shipping grew its EBIT by 207% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Great Eastern Shipping 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 company can only pay off debt with cold hard cash, not accounting profits. Great Eastern Shipping 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. Over the last three years, Great Eastern Shipping recorded free cash flow worth a fulsome 93% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Great Eastern Shipping has net cash of ₹16.9b, as well as more liquid assets than liabilities. The cherry on top was that in converted 93% of that EBIT to free cash flow, bringing in ₹25b. So we don't think Great Eastern Shipping's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example Great Eastern Shipping has 2 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.