We Think Gujarat Ambuja Exports (NSE:GAEL) Can Stay On Top Of Its Debt

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. As with many other companies Gujarat Ambuja Exports Limited (NSE:GAEL) makes use of debt. But should shareholders be worried about its use of debt?

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. If things get really bad, the lenders can take control of the business. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Gujarat Ambuja Exports

What Is Gujarat Ambuja Exports's Debt?

The image below, which you can click on for greater detail, shows that Gujarat Ambuja Exports had debt of ₹2.27b at the end of March 2023, a reduction from ₹2.78b over a year. However, it does have ₹6.86b in cash offsetting this, leading to net cash of ₹4.60b.

How Healthy Is Gujarat Ambuja Exports' Balance Sheet?

The latest balance sheet data shows that Gujarat Ambuja Exports had liabilities of ₹4.40b due within a year, and liabilities of ₹777.5m falling due after that. On the other hand, it had cash of ₹6.86b and ₹2.86b worth of receivables due within a year. So it actually has ₹4.54b 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 48% cut to EBIT over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Gujarat Ambuja Exports will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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's not great, when it comes to paying down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Gujarat Ambuja Exports has net cash of ₹4.60b, as well as more liquid assets than liabilities. So we don't have any problem with Gujarat Ambuja Exports's use of debt. 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. Case in point: We've spotted 1 warning sign for Gujarat Ambuja Exports you should be aware of.

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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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.