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 real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Gujarat Apollo Industries

What Is Gujarat Apollo Industries's Net Debt?

As you can see below, Gujarat Apollo Industries had ₹216.7m of debt at March 2024, down from ₹255.1m a year prior. However, it also had ₹29.3m in cash, and so its net debt is ₹187.4m.

How Healthy Is Gujarat Apollo Industries' Balance Sheet?

The latest balance sheet data shows that Gujarat Apollo Industries had liabilities of ₹328.3m due within a year, and liabilities of ₹36.3m falling due after that. Offsetting these obligations, it had cash of ₹29.3m as well as receivables valued at ₹1.81b due within 12 months. So it can boast ₹1.47b more liquid assets than total liabilities.

This excess liquidity is a great indication that Gujarat Apollo Industries' balance sheet is almost as strong as Fort Knox. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Gujarat Apollo Industries will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Gujarat Apollo Industries had a loss before interest and tax, and actually shrunk its revenue by 38%, to ₹571m. That makes us nervous, to say the least.

Caveat Emptor

Not only did Gujarat Apollo Industries's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at ₹78m. Looking on the brighter side, the business has adequate liquid assets, which give it time to grow and develop before its debt becomes a near-term issue. But we'd want to see some positive free cashflow before spending much time on trying to understand the stock. So it seems too risky for our taste. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example Gujarat Apollo Industries has 3 warning signs (and 1 which shouldn't be ignored) we think you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.

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