Gulf Oil Lubricants India (NSE:GULFOILLUB) Could Easily Take On More Debt

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Gulf Oil Lubricants India Limited (NSE:GULFOILLUB) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Gulf Oil Lubricants India

What Is Gulf Oil Lubricants India's Net Debt?

As you can see below, at the end of September 2024, Gulf Oil Lubricants India had ₹4.32b of debt, up from ₹3.77b a year ago. Click the image for more detail. However, its balance sheet shows it holds ₹8.90b in cash, so it actually has ₹4.58b 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 ₹11.5b falling due within a year, and liabilities of ₹560.0m due beyond that. Offsetting these obligations, it had cash of ₹8.90b as well as receivables valued at ₹5.21b due within 12 months. So it can boast ₹2.07b 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!

Another good sign is that Gulf Oil Lubricants India has been able to increase its EBIT by 21% in twelve months, making it easier to pay down debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Gulf Oil Lubricants India can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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. Over the most recent three years, Gulf Oil Lubricants India recorded free cash flow worth 65% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While it is always sensible to investigate a company's debt, in this case Gulf Oil Lubricants India has ₹4.58b in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 21% over the last year. So we don't think Gulf Oil Lubricants India's use of debt is risky. 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. For example, we've discovered 1 warning sign for Gulf Oil Lubricants 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.