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. We note that GTPL Hathway Limited (NSE:GTPL) does have debt on its balance sheet. But should shareholders be worried about its use of debt?
When Is Debt A Problem?
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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.
What Is GTPL Hathway's Debt?
You can click the graphic below for the historical numbers, but it shows that GTPL Hathway had ₹1.18b of debt in March 2022, down from ₹1.58b, one year before. But it also has ₹1.34b in cash to offset that, meaning it has ₹167.1m net cash.
A Look At GTPL Hathway's Liabilities
The latest balance sheet data shows that GTPL Hathway had liabilities of ₹11.0b due within a year, and liabilities of ₹1.25b falling due after that. Offsetting this, it had ₹1.34b in cash and ₹3.43b in receivables that were due within 12 months. So its liabilities total ₹7.50b more than the combination of its cash and short-term receivables.
This deficit isn't so bad because GTPL Hathway is worth ₹24.0b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. While it does have liabilities worth noting, GTPL Hathway also has more cash than debt, so we're pretty confident it can manage its debt safely.
GTPL Hathway's EBIT was pretty flat over the last year, but that shouldn't be an issue given the it doesn't have a lot of debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if GTPL Hathway can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. GTPL Hathway 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. In the last three years, GTPL Hathway's free cash flow amounted to 46% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.
Although GTPL Hathway's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of ₹167.1m. So we don't have any problem with GTPL Hathway's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 2 warning signs for GTPL Hathway that you should be aware of.
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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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.