Gujarat Ambuja Exports (NSE:GAEL) Seems To Use Debt Rather Sparingly

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We can see that Gujarat Ambuja Exports Limited (NSE:GAEL) does use debt in its business. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Gujarat Ambuja Exports

What Is Gujarat Ambuja Exports's Net Debt?

As you can see below, Gujarat Ambuja Exports had ₹1.53b of debt, at March 2021, which is about the same as the year before. You can click the chart for greater detail. However, it does have ₹2.63b in cash offsetting this, leading to net cash of ₹1.10b.

A Look At Gujarat Ambuja Exports' Liabilities

Zooming in on the latest balance sheet data, we can see that Gujarat Ambuja Exports had liabilities of ₹4.40b due within 12 months and liabilities of ₹660.8m due beyond that. Offsetting this, it had ₹2.63b in cash and ₹2.25b in receivables that were due within 12 months. So it has liabilities totalling ₹176.4m more than its cash and near-term receivables, combined.

Having regard to Gujarat Ambuja Exports' size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the ₹38.0b company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Gujarat Ambuja Exports boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, Gujarat Ambuja Exports grew its EBIT by 114% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. There's no doubt that we learn most about debt from the balance sheet. But it is Gujarat Ambuja Exports'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. Gujarat Ambuja Exports 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, Gujarat Ambuja Exports recorded free cash flow worth a fulsome 85% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Gujarat Ambuja Exports has ₹1.10b in net cash. And it impressed us with free cash flow of ₹1.5b, being 85% of its EBIT. So we don't think Gujarat Ambuja Exports's use of debt is risky. We'd be very excited to see if Gujarat Ambuja Exports insiders have been snapping up shares. If you are too, then click on this link right now to take a (free) peek at our list of reported insider transactions.

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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