Does Gujarat Apollo Industries (NSE:GUJAPOLLO) Have A Healthy Balance Sheet?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Gujarat Apollo Industries Limited (NSE:GUJAPOLLO) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Gujarat Apollo Industries

What Is Gujarat Apollo Industries's Net Debt?

The image below, which you can click on for greater detail, shows that Gujarat Apollo Industries had debt of ₹141.0m at the end of March 2020, a reduction from ₹172.1m over a year. But on the other hand it also has ₹1.61b in cash, leading to a ₹1.47b net cash position.

A Look At Gujarat Apollo Industries's Liabilities

The latest balance sheet data shows that Gujarat Apollo Industries had liabilities of ₹214.6m due within a year, and liabilities of ₹26.4m falling due after that. On the other hand, it had cash of ₹1.61b and ₹1.60b worth of receivables due within a year. So it can boast ₹2.98b more liquid assets than total liabilities.

This luscious liquidity implies that Gujarat Apollo Industries's balance sheet is sturdy like a giant sequoia tree. Having regard to this fact, we think its balance sheet is just as strong as misogynists are weak. Simply put, the fact that Gujarat Apollo Industries has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Gujarat Apollo Industries's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Gujarat Apollo Industries made a loss at the EBIT level, and saw its revenue drop to ₹265m, which is a fall of 12%. That's not what we would hope to see.

So How Risky Is Gujarat Apollo Industries?

While Gujarat Apollo Industries lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of ₹261m. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. There's no doubt the next few years will be crucial to how the business matures. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 4 warning signs we've spotted with Gujarat Apollo Industries .

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

If you’re looking to trade Gujarat Apollo Industries, open an account with the lowest-cost* platform trusted by professionals, Interactive Brokers. Their clients from over 200 countries and territories trade stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com.