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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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Godawari Power & Ispat Limited (NSE:GPIL) does carry debt. But is this debt a concern to shareholders?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.
Check out our latest analysis for Godawari Power & Ispat
How Much Debt Does Godawari Power & Ispat Carry?
You can click the graphic below for the historical numbers, but it shows that Godawari Power & Ispat had ₹18.9b of debt in March 2019, down from ₹21.2b, one year before. However, it also had ₹387.3m in cash, and so its net debt is ₹18.5b.
How Healthy Is Godawari Power & Ispat's Balance Sheet?
The latest balance sheet data shows that Godawari Power & Ispat had liabilities of ₹5.19b due within a year, and liabilities of ₹16.6b falling due after that. Offsetting this, it had ₹387.3m in cash and ₹1.75b in receivables that were due within 12 months. So its liabilities total ₹19.6b more than the combination of its cash and short-term receivables.
The deficiency here weighs heavily on the ₹5.49b company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet." So we'd watch its balance sheet closely, without a doubt At the end of the day, Godawari Power & Ispat would probably need a major re-capitalization if its creditors were to demand repayment.
In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.