Gulshan Polyols (NSE:GULPOLY) Has A Rock Solid 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.' 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. Importantly, Gulshan Polyols Limited (NSE:GULPOLY) does carry debt. But should shareholders be worried about its use of debt?

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. If things get really bad, the lenders can take control of the business. 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.

See our latest analysis for Gulshan Polyols

What Is Gulshan Polyols's Debt?

As you can see below, Gulshan Polyols had ₹163.0m of debt at March 2021, down from ₹994.0m a year prior. But on the other hand it also has ₹185.5m in cash, leading to a ₹22.4m net cash position.

A Look At Gulshan Polyols' Liabilities

Zooming in on the latest balance sheet data, we can see that Gulshan Polyols had liabilities of ₹1.04b due within 12 months and liabilities of ₹266.2m due beyond that. Offsetting these obligations, it had cash of ₹185.5m as well as receivables valued at ₹983.8m due within 12 months. So its liabilities total ₹140.0m more than the combination of its cash and short-term receivables.

This state of affairs indicates that Gulshan Polyols' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the ₹9.15b company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Gulshan Polyols boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that Gulshan Polyols grew its EBIT by 159% over twelve months. That boost will make it even easier to pay down debt going forward. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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. Over the last three years, Gulshan Polyols actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

We could understand if investors are concerned about Gulshan Polyols's liabilities, but we can be reassured by the fact it has has net cash of ₹22.4m. And it impressed us with free cash flow of ₹912m, being 103% of its EBIT. So is Gulshan Polyols's debt a risk? It doesn't seem so to us. 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. Case in point: We've spotted 2 warning signs for Gulshan Polyols you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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