Great Eastern Shipping (NSE:GESHIP) Has A Rock Solid Balance Sheet

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 The Great Eastern Shipping Company Limited (NSE:GESHIP) makes use of debt. But the more important question is: how much risk is that debt creating?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Great Eastern Shipping

What Is Great Eastern Shipping's Net Debt?

As you can see below, Great Eastern Shipping had ₹36.5b of debt at March 2023, down from ₹46.6b a year prior. But it also has ₹52.9b in cash to offset that, meaning it has ₹16.4b net cash.

How Healthy Is Great Eastern Shipping's Balance Sheet?

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. On the other hand, it had cash of ₹52.9b and ₹6.59b worth of receivables due within a year. So it actually has ₹10.2b 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!

In addition to that, we're happy to report that Great Eastern Shipping has boosted its EBIT by 95%, thus reducing the spectre of future debt repayments. 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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. During the last three years, Great Eastern Shipping generated free cash flow amounting to a very robust 96% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Great Eastern Shipping has net cash of ₹16.4b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of ₹25b, being 96% of its EBIT. So we don't think Great Eastern Shipping's use of debt is risky. 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 Great Eastern Shipping you should be aware of, and 1 of them is a bit concerning.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.