Gujarat State Fertilizers & Chemicals (NSE:GSFC) Seems To Use Debt Rather Sparingly

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Gujarat State Fertilizers & Chemicals Limited (NSE:GSFC) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Gujarat State Fertilizers & Chemicals

How Much Debt Does Gujarat State Fertilizers & Chemicals Carry?

You can click the graphic below for the historical numbers, but it shows that Gujarat State Fertilizers & Chemicals had ₹325.5m of debt in March 2021, down from ₹15.6b, one year before. However, it does have ₹11.2b in cash offsetting this, leading to net cash of ₹10.8b.

How Healthy Is Gujarat State Fertilizers & Chemicals' Balance Sheet?

According to the last reported balance sheet, Gujarat State Fertilizers & Chemicals had liabilities of ₹9.87b due within 12 months, and liabilities of ₹8.93b due beyond 12 months. Offsetting this, it had ₹11.2b in cash and ₹11.9b in receivables that were due within 12 months. So it can boast ₹4.29b more liquid assets than total liabilities.

This surplus suggests that Gujarat State Fertilizers & Chemicals has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Gujarat State Fertilizers & Chemicals boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Gujarat State Fertilizers & Chemicals has boosted its EBIT by 90%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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. Over the last three years, Gujarat State Fertilizers & Chemicals actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

While it is always sensible to investigate a company's debt, in this case Gujarat State Fertilizers & Chemicals has ₹10.8b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 121% of that EBIT to free cash flow, bringing in ₹17b. So is Gujarat State Fertilizers & Chemicals's debt a risk? It doesn't seem so to us. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Gujarat State Fertilizers & Chemicals (of which 1 is potentially serious!) 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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