Does Gokaldas Exports (NSE:GOKEX) Have A Healthy Balance Sheet?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. Importantly, Gokaldas Exports Limited (NSE:GOKEX) does carry debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. 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 step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Gokaldas Exports

What Is Gokaldas Exports's Net Debt?

As you can see below, at the end of September 2024, Gokaldas Exports had ₹4.02b of debt, up from ₹296.5m a year ago. Click the image for more detail. However, its balance sheet shows it holds ₹5.49b in cash, so it actually has ₹1.47b net cash.

How Strong Is Gokaldas Exports' Balance Sheet?

According to the last reported balance sheet, Gokaldas Exports had liabilities of ₹7.83b due within 12 months, and liabilities of ₹3.55b due beyond 12 months. Offsetting this, it had ₹5.49b in cash and ₹2.39b in receivables that were due within 12 months. So it has liabilities totalling ₹3.50b more than its cash and near-term receivables, combined.

Given Gokaldas Exports has a market capitalization of ₹79.0b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Gokaldas Exports boasts net cash, so it's fair to say it does not have a heavy debt load!

One way Gokaldas Exports could vanquish its debt would be if it stops borrowing more but continues to grow EBIT at around 12%, as it did over the last year. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Gokaldas Exports's ability to maintain a healthy balance sheet going forward. 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. While Gokaldas Exports 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, Gokaldas Exports saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

We could understand if investors are concerned about Gokaldas Exports's liabilities, but we can be reassured by the fact it has has net cash of ₹1.47b. And it also grew its EBIT by 12% over the last year. So we are not troubled with Gokaldas Exports's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Gokaldas Exports is showing 3 warning signs in our investment analysis , and 1 of those can't be ignored...

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.