These 4 Measures Indicate That Gulf Oil Lubricants India (NSE:GULFOILLUB) Is Using Debt Reasonably Well

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. As with many other companies Gulf Oil Lubricants India Limited (NSE:GULFOILLUB) makes use of debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Gulf Oil Lubricants India

How Much Debt Does Gulf Oil Lubricants India Carry?

The chart below, which you can click on for greater detail, shows that Gulf Oil Lubricants India had ₹3.02b in debt in September 2021; about the same as the year before. However, its balance sheet shows it holds ₹5.06b in cash, so it actually has ₹2.03b net cash.

A Look At Gulf Oil Lubricants India's Liabilities

We can see from the most recent balance sheet that Gulf Oil Lubricants India had liabilities of ₹6.49b falling due within a year, and liabilities of ₹334.8m due beyond that. On the other hand, it had cash of ₹5.06b and ₹2.33b worth of receivables due within a year. So it actually has ₹557.4m more liquid assets than total liabilities.

This short term liquidity is a sign that Gulf Oil Lubricants India could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Gulf Oil Lubricants India has more cash than debt is arguably a good indication that it can manage its debt safely.

And we also note warmly that Gulf Oil Lubricants India grew its EBIT by 15% last year, making its debt load easier to handle. There's no doubt that we learn most about debt from the balance sheet. But it is Gulf Oil Lubricants India's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

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 54% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing up

While it is always sensible to investigate a company's debt, in this case Gulf Oil Lubricants India has ₹2.03b in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 15% over the last year. So we don't think Gulf Oil Lubricants India's use of debt is risky. 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 instance, we've identified 2 warning signs for Gulf Oil Lubricants India that you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.