Here's Why GTPL Hathway (NSE:GTPL) Can Manage Its Debt Responsibly

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. As with many other companies GTPL Hathway Limited (NSE:GTPL) makes use of debt. But the real question is whether this debt is making the company risky.

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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for GTPL Hathway

What Is GTPL Hathway's Debt?

The image below, which you can click on for greater detail, shows that GTPL Hathway had debt of ₹1.18b at the end of March 2021, a reduction from ₹2.16b over a year. But on the other hand it also has ₹1.95b in cash, leading to a ₹763.4m net cash position.

A Look At GTPL Hathway's Liabilities

The latest balance sheet data shows that GTPL Hathway had liabilities of ₹13.0b due within a year, and liabilities of ₹972.9m falling due after that. Offsetting these obligations, it had cash of ₹1.95b as well as receivables valued at ₹4.30b due within 12 months. So its liabilities total ₹7.75b more than the combination of its cash and short-term receivables.

GTPL Hathway has a market capitalization of ₹20.3b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. 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.

And we also note warmly that GTPL Hathway grew its EBIT by 16% last year, making its debt load easier to handle. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if GTPL Hathway can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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 49% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing up

While GTPL Hathway does have more liabilities than liquid assets, it also has net cash of ₹763.4m. And it impressed us with its EBIT growth of 16% over the last year. 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. But ultimately, every company can contain risks that exist outside of the balance sheet. For example GTPL Hathway has 3 warning signs (and 1 which is a bit concerning) we think you should know about.

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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