Does GMR Airports Infrastructure (NSE:GMRINFRA) Have A Healthy Balance Sheet?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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 GMR Airports Infrastructure Limited (NSE:GMRINFRA) makes use of debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for GMR Airports Infrastructure

How Much Debt Does GMR Airports Infrastructure Carry?

The image below, which you can click on for greater detail, shows that GMR Airports Infrastructure had debt of ₹298.1b at the end of September 2022, a reduction from ₹363.9b over a year. However, it also had ₹45.9b in cash, and so its net debt is ₹252.2b.

How Healthy Is GMR Airports Infrastructure's Balance Sheet?

The latest balance sheet data shows that GMR Airports Infrastructure had liabilities of ₹52.2b due within a year, and liabilities of ₹335.3b falling due after that. Offsetting these obligations, it had cash of ₹45.9b as well as receivables valued at ₹8.73b due within 12 months. So its liabilities total ₹332.9b more than the combination of its cash and short-term receivables.

Given this deficit is actually higher than the company's market capitalization of ₹228.2b, we think shareholders really should watch GMR Airports Infrastructure's debt levels, like a parent watching their child ride a bike for the first time. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price.

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Weak interest cover of 0.71 times and a disturbingly high net debt to EBITDA ratio of 11.1 hit our confidence in GMR Airports Infrastructure like a one-two punch to the gut. The debt burden here is substantial. Another concern for investors might be that GMR Airports Infrastructure's EBIT fell 14% in the last year. If that's the way things keep going handling the debt load will be like delivering hot coffees on a pogo stick. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine GMR Airports Infrastructure's ability to maintain a healthy balance sheet going forward. 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. So the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. During the last three years, GMR Airports Infrastructure burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Our View

On the face of it, GMR Airports Infrastructure's interest cover left us tentative about the stock, and its conversion of EBIT to free cash flow was no more enticing than the one empty restaurant on the busiest night of the year. And furthermore, its level of total liabilities also fails to instill confidence. We should also note that Infrastructure industry companies like GMR Airports Infrastructure commonly do use debt without problems. We think the chances that GMR Airports Infrastructure has too much debt a very significant. To our minds, that means the stock is rather high risk, and probably one to avoid; but to each their own (investing) style. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that GMR Airports Infrastructure is showing 1 warning sign in our investment analysis , you should know about...

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.