Is Garware Hi-Tech Films (NSE:GRWRHITECH) A Risky Investment?

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. Importantly, Garware Hi-Tech Films Limited (NSE:GRWRHITECH) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Garware Hi-Tech Films

How Much Debt Does Garware Hi-Tech Films Carry?

The image below, which you can click on for greater detail, shows that Garware Hi-Tech Films had debt of ₹377.2m at the end of September 2023, a reduction from ₹1.69b over a year. But on the other hand it also has ₹3.56b in cash, leading to a ₹3.18b net cash position.

How Healthy Is Garware Hi-Tech Films' Balance Sheet?

We can see from the most recent balance sheet that Garware Hi-Tech Films had liabilities of ₹2.18b falling due within a year, and liabilities of ₹679.2m due beyond that. On the other hand, it had cash of ₹3.56b and ₹173.4m worth of receivables due within a year. So it actually has ₹871.6m 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 while it's hard to imagine that the ₹44.2b company is struggling for cash, we still think it's worth monitoring its 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 the other hand, Garware Hi-Tech Films's EBIT dived 10%, over the last year. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. 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 Garware Hi-Tech Films 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. Garware Hi-Tech Films may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the most recent three years, Garware Hi-Tech Films 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 it is always sensible to investigate a company's debt, in this case Garware Hi-Tech Films has ₹3.18b in net cash and a decent-looking balance sheet. So we are not troubled with Garware Hi-Tech Films's debt use. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 2 warning signs with Garware Hi-Tech Films , and understanding them should be part of your investment process.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.