Is Godawari Power & Ispat (NSE:GPIL) Using Too Much Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. As with many other companies Godawari Power & Ispat Limited (NSE:GPIL) makes use of debt. But is this debt a concern to shareholders?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Godawari Power & Ispat

What Is Godawari Power & Ispat's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Godawari Power & Ispat had ₹894.7m of debt in September 2023, down from ₹4.29b, one year before. But on the other hand it also has ₹7.06b in cash, leading to a ₹6.17b net cash position.

How Strong Is Godawari Power & Ispat's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Godawari Power & Ispat had liabilities of ₹6.85b due within 12 months and liabilities of ₹2.74b due beyond that. Offsetting this, it had ₹7.06b in cash and ₹2.02b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹512.0m.

This state of affairs indicates that Godawari Power & 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 ₹94.3b company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, Godawari Power & Ispat also has more cash than debt, so we're pretty confident it can manage its debt safely.

In fact Godawari Power & Ispat's saving grace is its low debt levels, because its EBIT has tanked 32% in the last twelve months. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Godawari Power & Ispat 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 Godawari Power & Ispat 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, Godawari Power & Ispat recorded free cash flow worth 51% 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 it is always sensible to look at a company's total liabilities, it is very reassuring that Godawari Power & Ispat has ₹6.17b in net cash. So we are not troubled with Godawari Power & Ispat's debt use. 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. For example, we've discovered 2 warning signs for Godawari Power & Ispat that you should be aware of before investing here.

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.