Want to participate in a short research study? Help shape the future of investing tools and you could win a $250 gift card!
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 note that Gulf Oil Lubricants India Limited (NSE:GULFOILLUB) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.
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. If things get really bad, the lenders can take control of the business. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is Gulf Oil Lubricants India’s Debt?
You can click the graphic below for the historical numbers, but it shows that as of March 2019 Gulf Oil Lubricants India had ₹2.83b of debt, an increase on ₹2.56b, over one year. However, its balance sheet shows it holds ₹2.94b in cash, so it actually has ₹104.0m net cash.
How Strong 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 ₹5.31b falling due within a year, and liabilities of ₹243.4m due beyond that. Offsetting these obligations, it had cash of ₹2.94b as well as receivables valued at ₹1.52b due within 12 months. So it has liabilities totalling ₹1.10b more than its cash and near-term receivables, combined.
Of course, Gulf Oil Lubricants India has a market capitalization of ₹43.1b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Given that Gulf Oil Lubricants India has more cash than debt, we’re pretty confident it can manage its debt safely.
Also good is that Gulf Oil Lubricants India grew its EBIT at 16% over the last year, further increasing its ability to manage 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.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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 last three years, Gulf Oil Lubricants India reported free cash flow worth 15% of its EBIT, which is really quite low. That limp level of cash conversion undermines its ability to manage and pay down debt.
We could understand if investors are concerned about Gulf Oil Lubricants India’s liabilities, but we can be reassured by the fact it has has net cash of ₹104m. And we liked the look of last year’s 16% year-on-year EBIT growth. So we don’t have any problem with Gulf Oil Lubricants India’s use of debt. We’d be motivated to research the stock further if we found out that Gulf Oil Lubricants India insiders have bought shares recently. If you would too, then you’re in luck, since today we’re sharing our list of reported insider transactions for free.
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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.