Gabriel India (NSE:GABRIEL) Seems To Use Debt Quite Sensibly

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Gabriel India Limited (NSE:GABRIEL) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Gabriel India

What Is Gabriel India's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Gabriel India had debt of ₹814.8m, up from ₹489.7m in one year. However, it does have ₹2.95b in cash offsetting this, leading to net cash of ₹2.13b.

A Look At Gabriel India's Liabilities

We can see from the most recent balance sheet that Gabriel India had liabilities of ₹7.62b falling due within a year, and liabilities of ₹651.5m due beyond that. On the other hand, it had cash of ₹2.95b and ₹5.89b worth of receivables due within a year. So it can boast ₹556.7m more liquid assets than total liabilities.

This state of affairs indicates that Gabriel India's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the ₹70.6b company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that Gabriel India has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, Gabriel India grew its EBIT by 37% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Gabriel India can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Gabriel India may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, Gabriel India reported free cash flow worth 14% of its EBIT, which is really quite low. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Gabriel India has ₹2.13b in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 37% over the last year. So is Gabriel India's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 1 warning sign for Gabriel India that you should be aware of before investing here.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.