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

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 more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Galaxy Surfactants

What Is Galaxy Surfactants's Debt?

The image below, which you can click on for greater detail, shows that Galaxy Surfactants had debt of ₹967.4m at the end of September 2024, a reduction from ₹1.90b over a year. But it also has ₹4.45b in cash to offset that, meaning it has ₹3.48b net cash.

How Healthy Is Galaxy Surfactants' Balance Sheet?

We can see from the most recent balance sheet that Galaxy Surfactants had liabilities of ₹7.33b falling due within a year, and liabilities of ₹1.09b due beyond that. Offsetting these obligations, it had cash of ₹4.45b as well as receivables valued at ₹6.07b due within 12 months. So it actually has ₹2.11b more liquid assets than total liabilities.

This surplus suggests that Galaxy Surfactants has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Galaxy Surfactants boasts net cash, so it's fair to say it does not have a heavy debt load!

But the bad news is that Galaxy Surfactants has seen its EBIT plunge 19% in the last twelve months. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. The balance sheet is clearly the area to focus on when you are analysing debt. 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. 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. During the last three years, Galaxy Surfactants produced sturdy free cash flow equating to 72% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While it is always sensible to investigate a company's debt, in this case Galaxy Surfactants has ₹3.48b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of ₹3.4b, being 72% of its EBIT. So we don't have any problem with Galaxy Surfactants's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Be aware that Galaxy Surfactants is showing 1 warning sign in our investment analysis , you should know about...

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.