Is Gujarat Pipavav Port (NSE:GPPL) A Risky Investment?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Gujarat Pipavav Port Limited (NSE:GPPL) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Gujarat Pipavav Port

What Is Gujarat Pipavav Port's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Gujarat Pipavav Port had ₹651.7m of debt in September 2024, down from ₹879.1m, one year before. But it also has ₹11.1b in cash to offset that, meaning it has ₹10.5b net cash.

A Look At Gujarat Pipavav Port's Liabilities

The latest balance sheet data shows that Gujarat Pipavav Port had liabilities of ₹4.21b due within a year, and liabilities of ₹2.51b falling due after that. Offsetting these obligations, it had cash of ₹11.1b as well as receivables valued at ₹482.4m due within 12 months. So it actually has ₹4.87b 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 6.8% over twelve months, which should ease any concerns about debt repayment. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Gujarat Pipavav Port'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. 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. During the last three years, Gujarat Pipavav Port generated free cash flow amounting to a very robust 89% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Gujarat Pipavav Port has net cash of ₹10.5b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of ₹4.3b, being 89% of its EBIT. So is Gujarat Pipavav Port'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. Case in point: We've spotted 1 warning sign for Gujarat Pipavav Port 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.