Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about. 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. We note that Gallantt Ispat Limited (NSE:GALLISPAT) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.
When Is Debt A Problem?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, 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.
See our latest analysis for Gallantt Ispat
What Is Gallantt Ispat's Net Debt?
The chart below, which you can click on for greater detail, shows that Gallantt Ispat had ₹2.42b in debt in September 2019; about the same as the year before. But on the other hand it also has ₹2.48b in cash, leading to a ₹59.2m net cash position.
How Strong Is Gallantt Ispat's Balance Sheet?
The latest balance sheet data shows that Gallantt Ispat had liabilities of ₹1.56b due within a year, and liabilities of ₹1.26b falling due after that. Offsetting this, it had ₹2.48b in cash and ₹615.1m in receivables that were due within 12 months. So it can boast ₹268.4m more liquid assets than total liabilities.
This short term liquidity is a sign that Gallantt Ispat could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Gallantt Ispat has more cash than debt is arguably a good indication that it can manage its debt safely.
In fact Gallantt Ispat's saving grace is its low debt levels, because its EBIT has tanked 23% in the last twelve months. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. When analysing debt levels, the balance sheet is the obvious place to start. But it is Gallantt Ispat's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.