Is Gujarat Ambuja Exports (NSE:GAEL) Using Too Much Debt?

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 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 note that Gujarat Ambuja Exports Limited (NSE:GAEL) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Gujarat Ambuja Exports

What Is Gujarat Ambuja Exports's Debt?

As you can see below, Gujarat Ambuja Exports had ₹721.2m of debt at September 2022, down from ₹1.22b a year prior. However, it does have ₹5.40b in cash offsetting this, leading to net cash of ₹4.67b.

A Look At Gujarat Ambuja Exports' Liabilities

We can see from the most recent balance sheet that Gujarat Ambuja Exports had liabilities of ₹2.26b falling due within a year, and liabilities of ₹734.4m due beyond that. Offsetting this, it had ₹5.40b in cash and ₹2.03b in receivables that were due within 12 months. So it can boast ₹4.44b more liquid assets than total liabilities.

This surplus suggests that Gujarat Ambuja Exports has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Gujarat Ambuja Exports has more cash than debt is arguably a good indication that it can manage its debt safely.

But the bad news is that Gujarat Ambuja Exports has seen its EBIT plunge 14% in the last twelve months. If that rate of decline in earnings continues, the company could find itself in a tight spot. The balance sheet is clearly the area to focus on when you are analysing debt. 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. While Gujarat Ambuja Exports 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. In the last three years, Gujarat Ambuja Exports's free cash flow amounted to 34% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While it is always sensible to investigate a company's debt, in this case Gujarat Ambuja Exports has ₹4.67b in net cash and a decent-looking balance sheet. So we are not troubled with Gujarat Ambuja Exports's debt use. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Gujarat Ambuja Exports's earnings per share history for free.

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.