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. We note that Gujarat Pipavav Port Limited (NSE:GPPL) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.
View our latest analysis for Gujarat Pipavav Port
How Much Debt Does Gujarat Pipavav Port Carry?
As you can see below, Gujarat Pipavav Port had ₹470.8m of debt, at March 2022, which is about the same as the year before. You can click the chart for greater detail. However, its balance sheet shows it holds ₹8.55b in cash, so it actually has ₹8.08b net cash.
How Healthy Is Gujarat Pipavav Port's Balance Sheet?
We can see from the most recent balance sheet that Gujarat Pipavav Port had liabilities of ₹2.53b falling due within a year, and liabilities of ₹2.36b due beyond that. Offsetting these obligations, it had cash of ₹8.55b as well as receivables valued at ₹544.5m due within 12 months. So it can boast ₹4.20b more liquid assets than total liabilities.
This surplus suggests that Gujarat Pipavav Port has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Gujarat Pipavav Port boasts net cash, so it's fair to say it does not have a heavy debt load!
The good news is that Gujarat Pipavav Port has increased its EBIT by 8.9% over twelve months, which should ease any concerns about debt repayment. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Gujarat Pipavav Port 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Gujarat Pipavav Port 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. Happily for any shareholders, Gujarat Pipavav Port actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.
Summing Up
While it is always sensible to investigate a company's debt, in this case Gujarat Pipavav Port has ₹8.08b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of ₹3.3b, being 107% of its EBIT. So we don't think Gujarat Pipavav Port's use of debt is risky. 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 - Gujarat Pipavav Port has 1 warning sign we think you should be aware of.
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.
About NSEI:GPPL
Gujarat Pipavav Port
Engages in the construction, operation, and maintenance of port at Pipavav in Gujarat, India.
Excellent balance sheet with proven track record.