These 4 measures indicate that Ganesh Housing (NSE: GANESHHOUC) uses debt reasonably well
Warren Buffett said: “Volatility is far from synonymous with risk”. When we think about how risky a business is, we always like to look at its use of debt because debt overload can lead to bankruptcy. Like many other companies Ganesh Housing Corporation Limited (NSE: GANESHHOUC) uses the debt. But does this debt concern shareholders?
Why Does Debt Bring Risk?
Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, then it exists at their mercy. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. However, a more common (but still costly) situation is where a company has to dilute its shareholders at a cheap share price just to get its debt under control. Of course, debt can be an important tool in businesses, especially capital intensive businesses. When we look at debt levels, we first consider both liquidity and debt levels.
See our latest review for Ganesh Housing
What is the debt of Ganesh Housing?
As you can see below, Ganesh Housing had a debt of 2.29 billion yen in September 2021, up from 5.39 billion yen the previous year. However, given that it has a cash reserve of 252.8 million yen, its net debt is less, at around 2.03 billion yen.
How healthy is Ganesh Housing’s track record?
We can see from the most recent balance sheet that Ganesh Housing had a liability of 3.12 billion yen maturing within one year and a liability of 715.5 million yen due beyond. On the other hand, he had 252.8 million yen in cash and 3.70 billion yen in receivables due within one year. It can therefore claim 116.1 million euros in liquid assets more than total Liabilities.
This state of affairs indicates that Ganesh Housing’s balance sheet looks quite strong, as its total liabilities roughly equal its cash flow. So the 10.0 billion yen company is highly unlikely to run out of cash, but it’s still worth keeping an eye on the balance sheet.
We measure a company’s indebtedness relative to its earning power by looking at its net debt divided by its earnings before interest, taxes, depreciation, and amortization (EBITDA) and calculating the ease with which its earnings before interest and taxes (EBIT ) covers its interests. costs (interest coverage). The advantage of this approach is that we take into account both the absolute amount of debt (with net debt versus EBITDA) and the actual interest charges associated with this debt (with its coverage rate). interests).
While we are not worried about Ganesh Housing’s 4.0 net debt to EBITDA ratio, we believe its ultra-low 1.0 times interest coverage is a sign of high leverage. Shareholders should therefore probably be aware that interest charges seem to have had a real impact on the company in recent times. A buyout factor for Ganesh Housing is that it turned last year’s loss of EBIT into a gain of 491 million yen, in the past twelve months. When analyzing debt levels, the balance sheet is the obvious starting point. But you can’t look at debt in isolation; since Ganesh Housing will need income to repay this debt. So, when considering debt, it is really worth looking at the profit trend. Click here for an interactive snapshot.
Finally, a business can only pay off its debts with hard cash, not with book profits. It is therefore worth checking to what extent earnings before interest and taxes (EBIT) are backed by free cash flow. Over the past year, Ganesh Housing recorded free cash flow totaling 92% of its EBIT, which is higher than what we usually expected. This positions it well to repay debt if it is desirable.
Our point of view
Based on what we have seen, Ganesh Housing does not find it easy, given its interest coverage, but the other factors we have taken into account give us cause for optimism. There is no doubt that its ability to convert EBIT into free cash flow is quite fast. Given this range of data points, we believe Ganesh Housing is in a good position to manage its debt levels. That said, the load is heavy enough that we recommend that any shareholder watch it closely. 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. For example, we have identified 3 warning signs for Ganesh Housing (1 is significant) you must be aware.
Of course, if you are the type of investor who prefers to buy stocks without going into debt, feel free to check out our exclusive list of cash growth stocks today.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative material. Simply Wall St has no position in the mentioned stocks.
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