Gujarat State Fertilizers & Chemicals (NSE:GSFC) Has A Rock Solid Balance Sheet

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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, Gujarat State Fertilizers & Chemicals Limited (NSE:GSFC) does carry debt. 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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 Gujarat State Fertilizers & Chemicals

How Much Debt Does Gujarat State Fertilizers & Chemicals Carry?

The image below, which you can click on for greater detail, shows that Gujarat State Fertilizers & Chemicals had debt of ₹327.2m at the end of September 2021, a reduction from ₹5.71b over a year. However, its balance sheet shows it holds ₹13.4b in cash, so it actually has ₹13.1b net cash.

A Look At Gujarat State Fertilizers & Chemicals' Liabilities

We can see from the most recent balance sheet that Gujarat State Fertilizers & Chemicals had liabilities of ₹15.1b falling due within a year, and liabilities of ₹9.62b due beyond that. Offsetting these obligations, it had cash of ₹13.4b as well as receivables valued at ₹16.3b due within 12 months. So it can boast ₹4.94b more liquid assets than total liabilities.

This short term liquidity is a sign that Gujarat State Fertilizers & Chemicals could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Gujarat State Fertilizers & Chemicals boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, Gujarat State Fertilizers & Chemicals grew its EBIT by 137% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Gujarat State Fertilizers & Chemicals'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, a company can only pay off debt with cold hard cash, not accounting profits. While Gujarat State Fertilizers & Chemicals 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. Happily for any shareholders, Gujarat State Fertilizers & Chemicals actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Gujarat State Fertilizers & Chemicals has net cash of ₹13.1b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of ₹5.8b, being 117% of its EBIT. So we don't think Gujarat State Fertilizers & Chemicals's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 2 warning signs for Gujarat State Fertilizers & Chemicals (1 doesn't sit too well with us) you should be aware of.

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.