GFL (NSE:GFLLIMITED) Has Debt But No Earnings; Should You Worry?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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, GFL Limited (NSE:GFLLIMITED) does carry debt. 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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 think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for GFL

How Much Debt Does GFL Carry?

As you can see below, GFL had ₹943.8m of debt at September 2021, down from ₹13.3b a year prior. However, its balance sheet shows it holds ₹2.33b in cash, so it actually has ₹1.39b net cash.

How Healthy Is GFL's Balance Sheet?

We can see from the most recent balance sheet that GFL had liabilities of ₹3.62b falling due within a year, and liabilities of ₹28.2b due beyond that. On the other hand, it had cash of ₹2.33b and ₹168.6m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹29.3b.

The deficiency here weighs heavily on the ₹7.63b company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. After all, GFL would likely require a major re-capitalisation if it had to pay its creditors today. GFL boasts net cash, so it's fair to say it does not have a heavy debt load, even if it does have very significant liabilities, in total. 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 GFL 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.

In the last year GFL had a loss before interest and tax, and actually shrunk its revenue by 93%, to ₹1.8b. That makes us nervous, to say the least.

So How Risky Is GFL?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year GFL had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through ₹1.7b of cash and made a loss of ₹1.9b. Given it only has net cash of ₹1.39b, the company may need to raise more capital if it doesn't reach break-even soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 2 warning signs for GFL you should be aware of, and 1 of them can't be ignored.

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.