Is Gallantt Ispat (NSE:GALLISPAT) A Risky Investment?

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. We note that Gallantt Ispat Limited (NSE:GALLISPAT) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Gallantt Ispat

How Much Debt Does Gallantt Ispat Carry?

You can click the graphic below for the historical numbers, but it shows that as of March 2021 Gallantt Ispat had ₹3.22b of debt, an increase on ₹2.37b, over one year. But on the other hand it also has ₹3.33b in cash, leading to a ₹104.7m net cash position.

A Look At Gallantt Ispat's Liabilities

According to the last reported balance sheet, Gallantt Ispat had liabilities of ₹2.77b due within 12 months, and liabilities of ₹1.10b due beyond 12 months. On the other hand, it had cash of ₹3.33b and ₹508.3m worth of receivables due within a year. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.

This state of affairs indicates that Gallantt Ispat's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the ₹18.8b company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, Gallantt Ispat boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Gallantt Ispat has boosted its EBIT by 86%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Gallantt Ispat 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Gallantt Ispat may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Considering the last three years, Gallantt Ispat actually recorded a cash outflow, overall. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Gallantt Ispat has ₹104.7m in net cash. And we liked the look of last year's 86% year-on-year EBIT growth. So we don't have any problem with Gallantt Ispat'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. Be aware that Gallantt Ispat 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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