Galaxy Surfactants (NSE:GALAXYSURF) Has A Pretty Healthy Balance Sheet

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Galaxy Surfactants Limited (NSE:GALAXYSURF) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Galaxy Surfactants

What Is Galaxy Surfactants's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2021 Galaxy Surfactants had debt of ₹3.60b, up from ₹2.50b in one year. On the flip side, it has ₹1.26b in cash leading to net debt of about ₹2.34b.

How Healthy Is Galaxy Surfactants' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Galaxy Surfactants had liabilities of ₹6.80b due within 12 months and liabilities of ₹1.77b due beyond that. Offsetting these obligations, it had cash of ₹1.26b as well as receivables valued at ₹5.59b due within 12 months. So it has liabilities totalling ₹1.72b more than its cash and near-term receivables, combined.

Having regard to Galaxy Surfactants' size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the ₹105.6b company is struggling for cash, we still think it's worth monitoring its balance sheet.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Galaxy Surfactants's net debt is only 0.57 times its EBITDA. And its EBIT easily covers its interest expense, being 68.4 times the size. So we're pretty relaxed about its super-conservative use of debt. The good news is that Galaxy Surfactants has increased its EBIT by 4.8% over twelve months, which should ease any concerns about debt repayment. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. In the last three years, Galaxy Surfactants's free cash flow amounted to 45% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Our View

Galaxy Surfactants's interest cover suggests it can handle its debt as easily as Cristiano Ronaldo could score a goal against an under 14's goalkeeper. And the good news does not stop there, as its net debt to EBITDA also supports that impression! When we consider the range of factors above, it looks like Galaxy Surfactants is pretty sensible with its use of debt. That means they are taking on a bit more risk, in the hope of boosting shareholder returns. 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. For example - Galaxy Surfactants has 1 warning sign we think 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.