Gulshan Polyols (NSE:GULPOLY) Could Easily Take On More Debt

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.' 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. We can see that Gulshan Polyols Limited (NSE:GULPOLY) does use debt in its business. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Gulshan Polyols

What Is Gulshan Polyols's Debt?

As you can see below, Gulshan Polyols had ₹114.4m of debt at September 2021, down from ₹845.6m a year prior. However, its balance sheet shows it holds ₹277.9m in cash, so it actually has ₹163.5m net cash.

A Look At Gulshan Polyols' Liabilities

The latest balance sheet data shows that Gulshan Polyols had liabilities of ₹1.17b due within a year, and liabilities of ₹256.8m falling due after that. Offsetting this, it had ₹277.9m in cash and ₹1.13b in receivables that were due within 12 months. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.

Having regard to Gulshan Polyols' size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the ₹16.4b company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, Gulshan Polyols also has more cash than debt, so we're pretty confident it can manage its debt safely.

In addition to that, we're happy to report that Gulshan Polyols has boosted its EBIT by 94%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But it is Gulshan Polyols's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Gulshan Polyols 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. During the last three years, Gulshan Polyols produced sturdy free cash flow equating to 72% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Gulshan Polyols has ₹163.5m in net cash. And it impressed us with its EBIT growth of 94% over the last year. So we don't think Gulshan Polyols's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 2 warning signs for Gulshan Polyols that you should be aware of before investing here.

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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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.