Gokul Agro Resources (NSE:GOKULAGRO) Seems To Use Debt Quite Sensibly

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 Gokul Agro Resources Limited (NSE:GOKULAGRO) makes use of debt. But the more important question is: how much risk is that debt creating?

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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Gokul Agro Resources

How Much Debt Does Gokul Agro Resources Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Gokul Agro Resources had ₹4.64b of debt, an increase on ₹4.41b, over one year. However, its balance sheet shows it holds ₹5.43b in cash, so it actually has ₹796.7m net cash.

A Look At Gokul Agro Resources' Liabilities

We can see from the most recent balance sheet that Gokul Agro Resources had liabilities of ₹23.9b falling due within a year, and liabilities of ₹3.02b due beyond that. On the other hand, it had cash of ₹5.43b and ₹3.59b worth of receivables due within a year. So its liabilities total ₹17.9b more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Gokul Agro Resources is worth ₹47.3b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Despite its noteworthy liabilities, Gokul Agro Resources boasts net cash, so it's fair to say it does not have a heavy debt load!

It is well worth noting that Gokul Agro Resources's EBIT shot up like bamboo after rain, gaining 36% in the last twelve months. That'll make it easier to manage its debt. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Gokul Agro Resources 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Gokul Agro Resources 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, Gokul Agro Resources reported free cash flow worth 20% 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 Gokul Agro Resources does have more liabilities than liquid assets, it also has net cash of ₹796.7m. And we liked the look of last year's 36% year-on-year EBIT growth. So we don't have any problem with Gokul Agro Resources's use of debt. Over time, share prices tend to follow earnings per share, so if you're interested in Gokul Agro Resources, you may well want to click here to check an interactive graph of its earnings per share history.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.