We Think Godawari Power & Ispat (NSE:GPIL) Can Stay On Top Of Its 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.' 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. As with many other companies Godawari Power & Ispat Limited (NSE:GPIL) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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. 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.

Check out our latest analysis for Godawari Power & Ispat

How Much Debt Does Godawari Power & Ispat Carry?

You can click the graphic below for the historical numbers, but it shows that Godawari Power & Ispat had ₹3.17b of debt in March 2023, down from ₹4.28b, one year before. However, it does have ₹8.44b in cash offsetting this, leading to net cash of ₹5.27b.

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 ₹9.48b due within 12 months and liabilities of ₹2.65b due beyond that. Offsetting these obligations, it had cash of ₹8.44b as well as receivables valued at ₹4.30b due within 12 months. So it actually has ₹609.9m more liquid assets than total liabilities.

Having regard to Godawari Power & Ispat's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the ₹55.3b company is short on cash, but still worth keeping an eye on the balance sheet. 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.

In fact Godawari Power & Ispat's saving grace is its low debt levels, because its EBIT has tanked 43% 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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 56% 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 Godawari Power & Ispat has net cash of ₹5.27b, as well as more liquid assets than liabilities. So we don't have any problem with Godawari Power & Ispat's use of debt. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Godawari Power & Ispat 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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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.