Is Gandhar Oil Refinery (India) (NSE:GANDHAR) Using Too Much Debt?

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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Gandhar Oil Refinery (India) Limited (NSE:GANDHAR) makes use of debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

Check out our latest analysis for Gandhar Oil Refinery (India)

What Is Gandhar Oil Refinery (India)'s Net Debt?

As you can see below, Gandhar Oil Refinery (India) had ₹1.59b of debt at September 2024, down from ₹3.91b a year prior. However, its balance sheet shows it holds ₹1.84b in cash, so it actually has ₹249.2m net cash.

A Look At Gandhar Oil Refinery (India)'s Liabilities

The latest balance sheet data shows that Gandhar Oil Refinery (India) had liabilities of ₹7.10b due within a year, and liabilities of ₹994.8m falling due after that. Offsetting this, it had ₹1.84b in cash and ₹7.01b in receivables that were due within 12 months. So it can boast ₹754.5m more liquid assets than total liabilities.

This short term liquidity is a sign that Gandhar Oil Refinery (India) could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Gandhar Oil Refinery (India) boasts net cash, so it's fair to say it does not have a heavy debt load!

Shareholders should be aware that Gandhar Oil Refinery (India)'s EBIT was down 32% last year. If that decline continues then paying off debt will be harder than selling foie gras at a vegan convention. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Gandhar Oil Refinery (India) will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Gandhar Oil Refinery (India) 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, Gandhar Oil Refinery (India) recorded negative free cash flow, in total. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.

Summing Up

While it is always sensible to investigate a company's debt, in this case Gandhar Oil Refinery (India) has ₹249.2m in net cash and a decent-looking balance sheet. So while Gandhar Oil Refinery (India) does not have a great balance sheet, it's certainly not too bad. 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, we've discovered 1 warning sign for Gandhar Oil Refinery (India) that you should be aware of before investing here.

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.