We Think GTPL Hathway (NSE:GTPL) Is Taking Some Risk With Its Debt

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.' 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 the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for GTPL Hathway

What Is GTPL Hathway's Debt?

As you can see below, at the end of March 2023, GTPL Hathway had ₹1.61b of debt, up from ₹1.33b a year ago. Click the image for more detail. But it also has ₹2.12b in cash to offset that, meaning it has ₹504.5m net cash.

How Strong Is GTPL Hathway's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that GTPL Hathway had liabilities of ₹13.7b due within 12 months and liabilities of ₹1.30b due beyond that. On the other hand, it had cash of ₹2.12b and ₹3.08b worth of receivables due within a year. So it has liabilities totalling ₹9.81b more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of ₹14.9b. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. Despite its noteworthy liabilities, GTPL Hathway boasts net cash, so it's fair to say it does not have a heavy debt load!

In fact GTPL Hathway's saving grace is its low debt levels, because its EBIT has tanked 41% in the last twelve months. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. There's no doubt that we learn most about debt from the balance sheet. But it is GTPL Hathway's earnings that will influence how the balance sheet holds up in the future. 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. While GTPL Hathway has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Looking at the most recent three years, GTPL Hathway recorded free cash flow of 44% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

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 ₹504.5m. So although we see some areas for improvement, we're not too worried about GTPL Hathway's balance sheet. 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. To that end, you should be aware of the 2 warning signs we've spotted with GTPL Hathway .

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.