Is Ganesh Housing (NSE:GANESHHOUC) A Risky Investment?

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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Ganesh Housing Corporation Limited (NSE:GANESHHOUC) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Ganesh Housing

What Is Ganesh Housing's Debt?

As you can see below, at the end of September 2024, Ganesh Housing had ₹321.8m of debt, up from ₹266.7m a year ago. Click the image for more detail. But on the other hand it also has ₹1.24b in cash, leading to a ₹922.8m net cash position.

How Strong Is Ganesh Housing's Balance Sheet?

We can see from the most recent balance sheet that Ganesh Housing had liabilities of ₹2.33b falling due within a year, and liabilities of ₹52.0m due beyond that. Offsetting these obligations, it had cash of ₹1.24b as well as receivables valued at ₹2.63b due within 12 months. So it actually has ₹1.49b more liquid assets than total liabilities.

Having regard to Ganesh Housing's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the ₹96.5b company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that Ganesh Housing has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, Ganesh Housing grew its EBIT by 31% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Ganesh Housing 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Ganesh Housing 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, Ganesh Housing's free cash flow amounted to 47% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While it is always sensible to investigate a company's debt, in this case Ganesh Housing has ₹922.8m in net cash and a decent-looking balance sheet. And we liked the look of last year's 31% year-on-year EBIT growth. So is Ganesh Housing's debt a risk? It doesn't seem so to us. 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 Ganesh Housing .

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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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.