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

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. We can see that Godawari Power & Ispat Limited (NSE:GPIL) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt A Problem?

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

See 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 ₹516.3m of debt in March 2024, down from ₹3.17b, one year before. However, its balance sheet shows it holds ₹8.70b in cash, so it actually has ₹8.18b net cash.

How Healthy 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 ₹7.45b due within 12 months and liabilities of ₹2.46b due beyond that. Offsetting this, it had ₹8.70b in cash and ₹3.65b in receivables that were due within 12 months. So it actually has ₹2.44b more liquid assets than total liabilities.

This short term liquidity is a sign that Godawari Power & Ispat could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Godawari Power & Ispat has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, Godawari Power & Ispat grew its EBIT by 53% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Godawari Power & Ispat can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

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. Looking at the most recent three years, Godawari Power & Ispat recorded free cash flow of 45% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Godawari Power & Ispat has net cash of ₹8.18b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 53% over the last year. So we don't think Godawari Power & Ispat's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Godawari Power & Ispat is showing 1 warning sign in our investment analysis , you should know about...

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.