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Warren Buffett famously said, '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, GFL Limited (NSE:GFLLIMITED) does carry debt. But should shareholders be worried about its use of debt?
When Is Debt A Problem?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.
See our latest analysis for GFL
What Is GFL's Debt?
You can click the graphic below for the historical numbers, but it shows that GFL had ₹18.6b of debt in March 2019, down from ₹20.0b, one year before. On the flip side, it has ₹3.20b in cash leading to net debt of about ₹15.4b.
How Healthy Is GFL's Balance Sheet?
According to the last reported balance sheet, GFL had liabilities of ₹34.8b due within 12 months, and liabilities of ₹8.03b due beyond 12 months. Offsetting this, it had ₹3.20b in cash and ₹22.8b in receivables that were due within 12 months. So it has liabilities totalling ₹16.8b more than its cash and near-term receivables, combined.
The deficiency here weighs heavily on the ₹5.17b 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 definitely think shareholders need to watch this one closely. After all, GFL would likely require a major re-capitalisation if it had to pay its creditors today.
We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.
Looking at its net debt to EBITDA of 1.3 and interest cover of 3.4 times, it seems to us that GFL is probably using debt in a pretty reasonable way. But the interest payments are certainly sufficient to have us thinking about how affordable its debt is. Importantly, GFL grew its EBIT by 57% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine GFL's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.