Garware Hi-Tech Films (NSE:GRWRHITECH) Seems To Use Debt Rather Sparingly

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 Garware Hi-Tech Films Limited (NSE:GRWRHITECH) makes use of debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Garware Hi-Tech Films

What Is Garware Hi-Tech Films's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Garware Hi-Tech Films had ₹199.1m of debt in March 2024, down from ₹1.57b, one year before. But on the other hand it also has ₹3.88b in cash, leading to a ₹3.68b net cash position.

A Look At Garware Hi-Tech Films' Liabilities

We can see from the most recent balance sheet that Garware Hi-Tech Films had liabilities of ₹2.22b falling due within a year, and liabilities of ₹570.0m due beyond that. Offsetting this, it had ₹3.88b in cash and ₹401.2m in receivables that were due within 12 months. So it can boast ₹1.49b more liquid assets than total liabilities.

This state of affairs indicates that Garware Hi-Tech Films' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the ₹89.5b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, Garware Hi-Tech Films boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Garware Hi-Tech Films 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 it is future earnings, more than anything, that will determine Garware Hi-Tech Films's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Garware Hi-Tech Films 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, Garware Hi-Tech Films recorded free cash flow worth 53% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While it is always sensible to investigate a company's debt, in this case Garware Hi-Tech Films has ₹3.68b in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 53% over the last year. So is Garware Hi-Tech Films's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 2 warning signs for Garware Hi-Tech Films you should be aware of, and 1 of them shouldn't be ignored.

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.