We Think Gallantt Ispat (NSE:GALLISPAT) Can Stay On Top Of Its Debt

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Gallantt Ispat Limited (NSE:GALLISPAT) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Gallantt Ispat

What Is Gallantt Ispat's Debt?

As you can see below, Gallantt Ispat had ₹2.23b of debt at September 2020, down from ₹2.42b a year prior. However, its balance sheet shows it holds ₹2.50b in cash, so it actually has ₹265.8m net cash.

A Look At Gallantt Ispat's Liabilities

According to the last reported balance sheet, Gallantt Ispat had liabilities of ₹2.08b due within 12 months, and liabilities of ₹1.10b due beyond 12 months. On the other hand, it had cash of ₹2.50b and ₹583.4m worth of receivables due within a year. So its liabilities total ₹101.6m more than the combination of its cash and short-term receivables.

Having regard to Gallantt Ispat's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the ₹10.8b company is short on cash, but still worth keeping an eye on the 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!

But the other side of the story is that Gallantt Ispat saw its EBIT decline by 5.3% over the last year. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. When analysing debt levels, the balance sheet is the obvious place to start. But it is Gallantt Ispat's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs 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. In the last three years, Gallantt Ispat created free cash flow amounting to 6.6% of its EBIT, an uninspiring performance. That limp level of cash conversion undermines its ability to manage and pay down debt.

Summing up

We could understand if investors are concerned about Gallantt Ispat's liabilities, but we can be reassured by the fact it has has net cash of ₹265.8m. So we don't have any problem with Gallantt Ispat's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 1 warning sign we've spotted with Gallantt Ispat .

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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