Is Gujarat Gas (NSE:GUJGASLTD) Using Too Much Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. As with many other companies Gujarat Gas Limited (NSE:GUJGASLTD) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth 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.

Check out our latest analysis for Gujarat Gas

How Much Debt Does Gujarat Gas Carry?

The image below, which you can click on for greater detail, shows that Gujarat Gas had debt of ₹1.46b at the end of September 2024, a reduction from ₹1.55b over a year. However, it does have ₹17.5b in cash offsetting this, leading to net cash of ₹16.0b.

A Look At Gujarat Gas' Liabilities

Zooming in on the latest balance sheet data, we can see that Gujarat Gas had liabilities of ₹32.8b due within 12 months and liabilities of ₹11.8b due beyond that. Offsetting these obligations, it had cash of ₹17.5b as well as receivables valued at ₹9.23b due within 12 months. So its liabilities total ₹17.9b more than the combination of its cash and short-term receivables.

Of course, Gujarat Gas has a market capitalization of ₹254.9b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Gujarat Gas boasts net cash, so it's fair to say it does not have a heavy debt load!

The good news is that Gujarat Gas has increased its EBIT by 8.6% over twelve months, which should ease any concerns about debt repayment. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Gujarat Gas 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, a company can only pay off debt with cold hard cash, not accounting profits. While Gujarat Gas 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. Over the most recent three years, Gujarat Gas recorded free cash flow worth 61% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

We could understand if investors are concerned about Gujarat Gas's liabilities, but we can be reassured by the fact it has has net cash of ₹16.0b. So we don't think Gujarat Gas's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in Gujarat Gas, you may well want to click here to check an interactive graph of its earnings per share history.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.