Does Gulshan Polyols (NSE:GULPOLY) Have A Healthy Balance Sheet?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. As with many other companies Gulshan Polyols Limited (NSE:GULPOLY) makes use of debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. 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 Gulshan Polyols

What Is Gulshan Polyols's Debt?

As you can see below, at the end of March 2022, Gulshan Polyols had ₹1.12b of debt, up from ₹105.3m a year ago. Click the image for more detail. However, its balance sheet shows it holds ₹1.23b in cash, so it actually has ₹111.2m net cash.

A Look At Gulshan Polyols' Liabilities

Zooming in on the latest balance sheet data, we can see that Gulshan Polyols had liabilities of ₹2.04b due within 12 months and liabilities of ₹651.8m due beyond that. On the other hand, it had cash of ₹1.23b and ₹1.20b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹260.0m.

Given Gulshan Polyols has a market capitalization of ₹12.5b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Gulshan Polyols boasts net cash, so it's fair to say it does not have a heavy debt load!

Also good is that Gulshan Polyols grew its EBIT at 20% over the last year, further increasing its ability to manage debt. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Gulshan Polyols will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Gulshan Polyols 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. In the last three years, Gulshan Polyols's free cash flow amounted to 26% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Gulshan Polyols has ₹111.2m in net cash. And we liked the look of last year's 20% year-on-year EBIT growth. So we are not troubled with Gulshan Polyols's debt use. 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. For instance, we've identified 4 warning signs for Gulshan Polyols (1 can't be ignored) you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.