Gujarat Ambuja Exports (NSE:GAEL) could easily take on more debt
Berkshire Hathaway’s Charlie Munger-backed outside fund manager Li Lu is quick to say, “The biggest risk in investing isn’t price volatility, but whether you’re going to suffer a permanent loss of capital “. When we think of a company’s risk, we always like to look at its use of debt, because over-indebtedness can lead to ruin. Like many other companies Gujarat Ambuja Exports Limited (NSE:GAEL) uses debt. But the more important question is: what risk does this debt create?
When is debt a problem?
Debt and other liabilities become risky for a business when it cannot easily meet those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case, a company can go bankrupt if it cannot pay its creditors. Although not too common, we often see companies in debt permanently diluting their shareholders because lenders force them to raise capital at a ridiculous price. Of course, many companies use debt to finance their growth, without any negative consequences. When we think about a company’s use of debt, we first look at cash and debt together.
See our latest analysis for Gujarat Ambuja exports
What is the export debt of Gujarat Ambuja?
As you can see below, at the end of March 2022, Gujarat Ambuja Exports had a debt of ₹2.69 billion, up from ₹1.53 billion a year ago. Click on the image for more details. However, he has ₹6.81 billion in cash to offset this, resulting in a net cash of ₹4.12 billion.
How healthy is Gujarat Ambuja’s export balance sheet?
According to the latest published balance sheet, Gujarat Ambuja Exports had liabilities of ₹5.61 billion due within 12 months and liabilities of ₹733.7 million due beyond 12 months. As compensation for these obligations, it had cash of ₹6.81 billion as well as receivables valued at ₹2.24 billion due within 12 months. It can therefore boast of ₹2.71 billion more liquid assets than total Passives.
This surplus suggests that Gujarat Ambuja Exports has a cautious balance sheet and could probably eliminate its debt without too much difficulty. Simply put, the fact that Gujarat Ambuja Exports has more cash than debt is arguably a good indication that it can safely manage its debt.
On top of that, we are pleased to report that Gujarat Ambuja Exports increased its EBIT by 36%, reducing the specter of future debt repayments. There is no doubt that we learn the most about debt from the balance sheet. But you can’t look at debt in total isolation; since Gujarat Ambuja Exports will need revenue to repay this debt. So, when considering debt, it is definitely worth looking at the earnings trend. Click here for an interactive preview.
Finally, a business needs free cash flow to pay off its debts; book profits are not enough. Although Gujarat Ambuja Exports has net cash on its balance sheet, it is still worth looking at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is growing. builds (or erodes) cash balance. Over the past three years, Gujarat Ambuja Exports has recorded free cash flow of 50% of its EBIT, which is about normal given that free cash flow excludes interest and taxes. This cold hard cash allows him to reduce his debt whenever he wants.
While we sympathize with investors who find debt a concern, you should bear in mind that Gujarat Ambuja Exports has a net cash position of ₹4.12 billion, as well as more liquid assets than liabilities. And we liked the look of EBIT growth of 36% YoY last year. We therefore do not believe that the use of debt by Gujarat Ambuja Exports is risky. When analyzing debt levels, the balance sheet is the obvious starting point. But at the end of the day, every business can contain risks that exist outside of the balance sheet. These risks can be difficult to spot. Every business has them, and we’ve spotted 1 warning sign for Gujarat Ambuja Exports you should know.
In the end, it’s often best to focus on companies that aren’t in debt. You can access our special list of these companies (all with a track record of earnings growth). It’s free.
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