These 4 Measures Indicate That Great Eastern Shipping (NSE:GESHIP) Is Using Debt Safely

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, The Great Eastern Shipping Company Limited (NSE:GESHIP) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. 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 examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Great Eastern Shipping

What Is Great Eastern Shipping's Debt?

You can click the graphic below for the historical numbers, but it shows that Great Eastern Shipping had ₹27.7b of debt in September 2024, down from ₹34.7b, one year before. However, its balance sheet shows it holds ₹74.2b in cash, so it actually has ₹46.5b net cash.

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 ₹16.1b due within 12 months and liabilities of ₹25.6b due beyond that. Offsetting this, it had ₹74.2b in cash and ₹4.87b in receivables that were due within 12 months. So it can boast ₹37.4b more liquid assets than total liabilities.

It's good to see that Great Eastern Shipping has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that Great Eastern Shipping has more cash than debt is arguably a good indication that it can manage its debt safely.

And we also note warmly that Great Eastern Shipping grew its EBIT by 11% last year, making its debt load easier to handle. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Great Eastern Shipping's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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. During the last three years, Great Eastern Shipping generated free cash flow amounting to a very robust 91% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While it is always sensible to investigate a company's debt, in this case Great Eastern Shipping has ₹46.5b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of ₹15b, being 91% 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. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Great Eastern Shipping (of which 1 is a bit unpleasant!) you should know about.

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.