Is Galaxy Surfactants (NSE:GALAXYSURF) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Galaxy Surfactants

What Is Galaxy Surfactants's Debt?

As you can see below, Galaxy Surfactants had ₹1.90b of debt at September 2023, down from ₹4.14b a year prior. But it also has ₹3.05b in cash to offset that, meaning it has ₹1.15b net cash.

How Strong Is Galaxy Surfactants' Balance Sheet?

The latest balance sheet data shows that Galaxy Surfactants had liabilities of ₹5.67b due within a year, and liabilities of ₹1.49b falling due after that. On the other hand, it had cash of ₹3.05b and ₹6.42b worth of receivables due within a year. So it actually has ₹2.31b 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!

The good news is that Galaxy Surfactants has increased its EBIT by 4.4% 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 ultimately the future profitability of the business will decide if Galaxy Surfactants can strengthen its balance sheet over time. 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. In the last three years, Galaxy Surfactants's free cash flow amounted to 45% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Galaxy Surfactants has ₹1.15b in net cash and a decent-looking balance sheet. And it also grew its EBIT by 4.4% over the last year. So we don't have any problem with Galaxy Surfactants's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. 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.

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.