Does Gulf Oil Lubricants India (NSE:GULFOILLUB) Have A Healthy Balance Sheet?

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 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. We can see that Gulf Oil Lubricants India Limited (NSE:GULFOILLUB) does use debt in its business. But is this debt a concern to shareholders?

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. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Gulf Oil Lubricants India

How Much Debt Does Gulf Oil Lubricants India Carry?

As you can see below, at the end of September 2023, Gulf Oil Lubricants India had ₹3.77b of debt, up from ₹3.57b a year ago. Click the image for more detail. But it also has ₹7.23b in cash to offset that, meaning it has ₹3.46b net cash.

How Healthy Is Gulf Oil Lubricants India's Balance Sheet?

We can see from the most recent balance sheet that Gulf Oil Lubricants India had liabilities of ₹9.85b falling due within a year, and liabilities of ₹417.8m due beyond that. On the other hand, it had cash of ₹7.23b and ₹4.82b worth of receivables due within a year. So it actually has ₹1.79b more liquid assets than total liabilities.

This surplus suggests that Gulf Oil Lubricants India has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Gulf Oil Lubricants India boasts net cash, so it's fair to say it does not have a heavy debt load!

Also good is that Gulf Oil Lubricants India grew its EBIT at 12% over the last year, further increasing its ability to manage debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Gulf Oil Lubricants India'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 business needs free cash flow to pay off debt; accounting profits just don't cut it. While Gulf Oil Lubricants 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. In the last three years, Gulf Oil Lubricants India's free cash flow amounted to 45% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Gulf Oil Lubricants India has net cash of ₹3.46b, as well as more liquid assets than liabilities. On top of that, it increased its EBIT by 12% in the last twelve months. So is Gulf Oil Lubricants India's debt a risk? It doesn't seem so to us. 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. Case in point: We've spotted 1 warning sign for Gulf Oil Lubricants India you should be aware of.

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.