Does Galaxy Surfactants (NSE:GALAXYSURF) Have A Healthy Balance Sheet?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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 note that Galaxy Surfactants Limited (NSE:GALAXYSURF) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.

What Is Galaxy Surfactants's Net Debt?

As you can see below, Galaxy Surfactants had ₹1.49b of debt at September 2024, down from ₹2.43b a year prior. But it also has ₹4.45b in cash to offset that, meaning it has ₹2.96b net cash.

A Look At Galaxy Surfactants' Liabilities

According to the last reported balance sheet, Galaxy Surfactants had liabilities of ₹7.33b due within 12 months, and liabilities of ₹1.09b due beyond 12 months. On the other hand, it had cash of ₹4.45b and ₹6.07b worth of receivables due within a year. So it can boast ₹2.11b more liquid assets than total liabilities.

This short term liquidity is a sign that Galaxy Surfactants could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Galaxy Surfactants boasts net cash, so it's fair to say it does not have a heavy debt load!

See our latest analysis for Galaxy Surfactants

On the other hand, Galaxy Surfactants's EBIT dived 12%, over the last year. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Galaxy Surfactants'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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Galaxy Surfactants 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. Over the last three years, Galaxy Surfactants recorded free cash flow worth a fulsome 81% 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 investigate a company's debt, in this case Galaxy Surfactants has ₹2.96b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of ₹3.4b, being 81% of its EBIT. So is Galaxy Surfactants's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 1 warning sign for Galaxy Surfactants that you should be aware of before investing here.

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.