Howard Marks put it well when he said that, rather than worrying about stock price volatility, “The possibility of permanent loss is the risk I worry about … and every investor practice that I know is worried. ” So it seems like smart money knows that debt – which is usually involved in bankruptcies – is a very important factor, when you assess the level of risk of a business. Like many other companies GNA Axles Limited (NSE: GNA) uses the debt. But the most important question is: what risk does this debt create?
What risk does debt entail?
Debt helps a business until the business struggles to repay it, either with new capital or with free cash flow. In the worst case scenario, a business can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that he must raise new equity at low cost, thereby diluting shareholders over the long term. Of course, many companies use debt to finance their growth without negative consequences. When we think of a business’s use of debt, we first look at cash flow and debt together.
How much debt do GNA axles carry?
As you can see below, GNA Axles had a debt of 1.97 billion yen in March 2021, which is roughly the same as the year before. You can click on the graph for more details. However, he also had 195.1 million yen in cash, so his net debt is 1.77 billion yen.
A look at the responsibilities of GNA Axles
The latest balance sheet data shows GNA Axles had liabilities of 3.65 billion yen due within one year, and liabilities of 769.1 million yen due after that. On the other hand, he had 195.1 million yen in cash and 4.38 billion yen in receivables due within one year. He can therefore boast of having 154.6 million euros in liquid assets more than total Liabilities.
This fact indicates that GNA Axles’ balance sheet looks quite strong, as its total liabilities roughly equal its liquid assets. So while it’s hard to imagine the ₹ 8.14ba company struggling to find money, we still think it’s worth watching its balance sheet.
We use two main ratios to inform us about the levels of debt compared to earnings. The first is net debt divided by earnings before interest, taxes, depreciation, and amortization (EBITDA), while the second is the number of times its profit before interest and taxes (EBIT) covers its interest expense (or its coverage of interest, for short). In this way, we consider both the absolute amount of debt, as well as the interest rates paid on it.
GNA Axles’ net debt is only 1.2 times its EBITDA. And its EBIT covers its interest costs a whopping 12.1 times. So we’re pretty relaxed about its ultra-conservative use of debt. On top of that, we are happy to report that GNA Axles has increased its EBIT by 55%, reducing the specter of future debt repayments. When analyzing debt levels, the balance sheet is the obvious starting point. But you can’t look at debt in isolation; since GNA Axles will need income to repay this debt. So if you want to know more about his earnings, it might be worth checking out this graph of his long-term profit trend.
Finally, a business can only pay off its debts with hard cash, not with book profits. We therefore always check how much of this EBIT is converted into free cash flow. Over the past three years, GNA Axles has essentially reached breakeven point on the basis of free cash flow. Some might say that this is a concern, given how easily it would be to reduce his debt.
Our point of view
Fortunately, GNA Axles’ impressive interest coverage means that it has the upper hand over its debt. But the hard truth is that we are concerned about its conversion from EBIT to free cash flow. When we consider the range of factors above, it looks like GNA Axles is being pretty reasonable with its use of debt. This means that they are taking a bit more risk, in the hope of increasing returns for shareholders. 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 off the balance sheet. Concrete example: we have spotted 1 warning sign for GNA axles you must be aware.
If you are interested in investing in companies that can generate profits without the burden of debt, check out this page. free list of growing companies that have net cash on the balance sheet.
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