Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We can see that GOCL Corporation Limited (NSE:GOCLCORP) does use debt in its business. 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.
View our latest analysis for GOCL
How Much Debt Does GOCL Carry?
As you can see below, GOCL had ₹11.9b of debt at March 2024, down from ₹17.7b a year prior. However, it does have ₹889.1m in cash offsetting this, leading to net debt of about ₹11.0b.
How Healthy Is GOCL's Balance Sheet?
According to the last reported balance sheet, GOCL had liabilities of ₹3.05b due within 12 months, and liabilities of ₹11.8b due beyond 12 months. On the other hand, it had cash of ₹889.1m and ₹10.8b worth of receivables due within a year. So it has liabilities totalling ₹3.12b more than its cash and near-term receivables, combined.
Of course, GOCL has a market capitalization of ₹20.2b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since GOCL 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.
In the last year GOCL had a loss before interest and tax, and actually shrunk its revenue by 23%, to ₹7.1b. That makes us nervous, to say the least.
Caveat Emptor
Not only did GOCL's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost ₹282m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. On the bright side, we note that trailing twelve month EBIT is worse than the free cash flow of ₹244m and the profit of ₹483m. So one might argue that there's still a chance it can get things on the right track. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for GOCL (of which 1 shouldn't be ignored!) you should know about.
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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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.
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About NSEI:GOCLCORP
GOCL
Engages in the energetics, mining and infrastructure, and realty businesses in India and internationally.
Low with questionable track record.
