We Think Gabriel India (NSE:GABRIEL) Can Stay On Top Of Its Debt

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Gabriel India Limited (NSE:GABRIEL) makes use of debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Gabriel India

What Is Gabriel India's Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Gabriel India had ₹251.7m of debt, an increase on ₹40.0k, over one year. However, it does have ₹3.03b in cash offsetting this, leading to net cash of ₹2.78b.

How Healthy Is Gabriel India's Balance Sheet?

We can see from the most recent balance sheet that Gabriel India had liabilities of ₹7.05b falling due within a year, and liabilities of ₹723.1m due beyond that. On the other hand, it had cash of ₹3.03b and ₹4.96b worth of receivables due within a year. So it can boast ₹217.4m more liquid assets than total liabilities.

Having regard to Gabriel India's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the ₹72.4b company is short on cash, but still worth keeping an eye on the 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 42% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Gabriel India can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Gabriel India has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, Gabriel India reported free cash flow worth 16% of its EBIT, which is really quite low. That limp level of cash conversion undermines its ability to manage and pay down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Gabriel India has net cash of ₹2.78b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 42% over the last year. So we don't think Gabriel India's use of debt is risky. 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. To that end, you should learn about the 2 warning signs we've spotted with Gabriel India (including 1 which is concerning) .

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.