We Think Gokul Agro Resources (NSE:GOKULAGRO) Can Stay On Top Of Its Debt

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Gokul Agro Resources Limited (NSE:GOKULAGRO) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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.

See our latest analysis for Gokul Agro Resources

What Is Gokul Agro Resources's Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2022 Gokul Agro Resources had ₹2.89b of debt, an increase on ₹1.85b, over one year. But it also has ₹3.31b in cash to offset that, meaning it has ₹417.3m net cash.

How Strong Is Gokul Agro Resources' Balance Sheet?

We can see from the most recent balance sheet that Gokul Agro Resources had liabilities of ₹11.4b falling due within a year, and liabilities of ₹1.10b due beyond that. Offsetting this, it had ₹3.31b in cash and ₹2.44b in receivables that were due within 12 months. So its liabilities total ₹6.72b more than the combination of its cash and short-term receivables.

Gokul Agro Resources has a market capitalization of ₹15.5b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. While it does have liabilities worth noting, Gokul Agro Resources also has more cash than debt, so we're pretty confident it can manage its debt safely.

It is well worth noting that Gokul Agro Resources's EBIT shot up like bamboo after rain, gaining 74% 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, a company can only pay off debt with cold hard cash, not accounting profits. While Gokul Agro Resources 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. In the last three years, Gokul Agro Resources's free cash flow amounted to 47% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing up

While Gokul Agro Resources does have more liabilities than liquid assets, it also has net cash of ₹417.3m. And we liked the look of last year's 74% year-on-year EBIT growth. So we don't have any problem with Gokul Agro Resources's use of debt. 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. Case in point: We've spotted 3 warning signs for Gokul Agro Resources you should be aware of, and 1 of them 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.