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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. Importantly, Gallantt Metal Limited (NSE:GALLANTT) does carry debt. But the real question is whether this debt is making the company risky.
What Risk Does Debt Bring?
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. 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. 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 step when considering a company's debt levels is to consider its cash and debt together.
See our latest analysis for Gallantt Metal
What Is Gallantt Metal's Net Debt?
You can click the graphic below for the historical numbers, but it shows that as of September 2019 Gallantt Metal had ₹1.09b of debt, an increase on ₹512.6m, over one year. However, it does have ₹49.2m in cash offsetting this, leading to net debt of about ₹1.04b.
A Look At Gallantt Metal's Liabilities
We can see from the most recent balance sheet that Gallantt Metal had liabilities of ₹1.37b falling due within a year, and liabilities of ₹8.22m due beyond that. Offsetting these obligations, it had cash of ₹49.2m as well as receivables valued at ₹370.3m due within 12 months. So its liabilities total ₹958.5m more than the combination of its cash and short-term receivables.
Gallantt Metal has a market capitalization of ₹2.14b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution.
We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.