We Think Gujarat Ambuja Exports (NSE:GAEL) Can Manage Its Debt With Ease

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Gujarat Ambuja Exports

How Much Debt Does Gujarat Ambuja Exports Carry?

You can click the graphic below for the historical numbers, but it shows that Gujarat Ambuja Exports had ₹1.02b of debt in September 2020, down from ₹1.52b, one year before. However, its balance sheet shows it holds ₹1.53b in cash, so it actually has ₹508.5m net cash.

How Healthy Is Gujarat Ambuja Exports' Balance Sheet?

We can see from the most recent balance sheet that Gujarat Ambuja Exports had liabilities of ₹2.91b falling due within a year, and liabilities of ₹530.6m due beyond that. Offsetting these obligations, it had cash of ₹1.53b as well as receivables valued at ₹1.86b due within 12 months. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.

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 ₹32.3b 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!

On top of that, Gujarat Ambuja Exports grew its EBIT by 92% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Gujarat Ambuja Exports will need earnings to service that debt. 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 most recent three years, Gujarat Ambuja Exports recorded free cash flow worth 70% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Gujarat Ambuja Exports has ₹508.5m in net cash. And we liked the look of last year's 92% year-on-year EBIT growth. So we don't think Gujarat Ambuja Exports's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Gujarat Ambuja Exports you should know about.

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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