These 4 Measures Indicate That Gujarat Ambuja Exports (NSE:GAEL) Is Using Debt Reasonably Well

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 Gujarat Ambuja Exports Limited (NSE:GAEL) makes use of debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Gujarat Ambuja Exports

How Much Debt Does Gujarat Ambuja Exports Carry?

As you can see below, at the end of September 2023, Gujarat Ambuja Exports had ₹2.91b of debt, up from ₹721.2m a year ago. Click the image for more detail. However, it does have ₹5.98b in cash offsetting this, leading to net cash of ₹3.07b.

How Healthy Is Gujarat Ambuja Exports' Balance Sheet?

We can see from the most recent balance sheet that Gujarat Ambuja Exports had liabilities of ₹4.84b falling due within a year, and liabilities of ₹837.6m due beyond that. Offsetting these obligations, it had cash of ₹5.98b as well as receivables valued at ₹2.41b due within 12 months. So it can boast ₹2.72b 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.

The modesty of its debt load may become crucial for Gujarat Ambuja Exports if management cannot prevent a repeat of the 33% cut to EBIT over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Gujarat Ambuja Exports'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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. In the last three years, Gujarat Ambuja Exports created free cash flow amounting to 13% of its EBIT, an uninspiring performance. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Gujarat Ambuja Exports has ₹3.07b in net cash and a decent-looking balance sheet. So we don't have any problem with Gujarat Ambuja Exports's use of debt. We'd be motivated to research the stock further if we found out that Gujarat Ambuja Exports insiders have bought shares recently. If you would too, then you're in luck, since today we're sharing our list of reported insider transactions for free.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.