We Think Gokaldas Exports (NSE:GOKEX) Can Manage Its Debt With Ease

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.' 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 can see that Gokaldas Exports Limited (NSE:GOKEX) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Gokaldas Exports

What Is Gokaldas Exports's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Gokaldas Exports had ₹630.7m of debt in March 2022, down from ₹3.65b, one year before. However, its balance sheet shows it holds ₹1.67b in cash, so it actually has ₹1.04b net cash.

How Strong Is Gokaldas Exports' Balance Sheet?

According to the last reported balance sheet, Gokaldas Exports had liabilities of ₹3.91b due within 12 months, and liabilities of ₹1.12b due beyond 12 months. On the other hand, it had cash of ₹1.67b and ₹921.9m worth of receivables due within a year. So it has liabilities totalling ₹2.44b more than its cash and near-term receivables, combined.

Given Gokaldas Exports has a market capitalization of ₹27.8b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Gokaldas Exports also has more cash than debt, so we're pretty confident it can manage its debt safely.

Notably, Gokaldas Exports's EBIT launched higher than Elon Musk, gaining a whopping 149% on 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, a company can only pay off debt with cold hard cash, not accounting profits. 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 recorded free cash flow worth a fulsome 93% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Gokaldas Exports has ₹1.04b in net cash. The cherry on top was that in converted 93% of that EBIT to free cash flow, bringing in ₹374m. So we don't think Gokaldas Exports's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for Gokaldas Exports that you should be aware of.

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.