Is Gujarat Narmada Valley Fertilizers & Chemicals (NSE:GNFC) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Gujarat Narmada Valley Fertilizers & Chemicals Limited (NSE:GNFC) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Gujarat Narmada Valley Fertilizers & Chemicals

How Much Debt Does Gujarat Narmada Valley Fertilizers & Chemicals Carry?

The image below, which you can click on for greater detail, shows that Gujarat Narmada Valley Fertilizers & Chemicals had debt of ₹770.0m at the end of September 2024, a reduction from ₹1.71b over a year. But on the other hand it also has ₹22.9b in cash, leading to a ₹22.1b net cash position.

How Strong Is Gujarat Narmada Valley Fertilizers & Chemicals' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Gujarat Narmada Valley Fertilizers & Chemicals had liabilities of ₹11.7b due within 12 months and liabilities of ₹13.0b due beyond that. On the other hand, it had cash of ₹22.9b and ₹8.53b worth of receivables due within a year. So it can boast ₹6.66b more liquid assets than total liabilities.

This surplus suggests that Gujarat Narmada Valley Fertilizers & Chemicals has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Gujarat Narmada Valley Fertilizers & Chemicals has more cash than debt is arguably a good indication that it can manage its debt safely.

In fact Gujarat Narmada Valley Fertilizers & Chemicals's saving grace is its low debt levels, because its EBIT has tanked 69% in the last twelve months. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. When analysing debt levels, the balance sheet is the obvious place to start. But it is Gujarat Narmada Valley Fertilizers & Chemicals's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Gujarat Narmada Valley Fertilizers & Chemicals 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. Over the most recent three years, Gujarat Narmada Valley Fertilizers & Chemicals recorded free cash flow worth 61% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Gujarat Narmada Valley Fertilizers & Chemicals has net cash of ₹22.1b, as well as more liquid assets than liabilities. So we don't have any problem with Gujarat Narmada Valley Fertilizers & Chemicals's use of debt. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example - Gujarat Narmada Valley Fertilizers & Chemicals has 2 warning signs we think you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.