We Think Gulf Oil Lubricants India (NSE:GULFOILLUB) Can Stay On Top Of Its Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies Gulf Oil Lubricants India Limited (NSE:GULFOILLUB) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Gulf Oil Lubricants India

What Is Gulf Oil Lubricants India's Debt?

The chart below, which you can click on for greater detail, shows that Gulf Oil Lubricants India had ₹2.92b in debt in September 2020; about the same as the year before. But it also has ₹5.97b in cash to offset that, meaning it has ₹3.05b net cash.

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

Zooming in on the latest balance sheet data, we can see that Gulf Oil Lubricants India had liabilities of ₹5.71b due within 12 months and liabilities of ₹266.4m due beyond that. Offsetting this, it had ₹5.97b in cash and ₹1.53b in receivables that were due within 12 months. So it actually has ₹1.52b 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. 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.

The modesty of its debt load may become crucial for Gulf Oil Lubricants India if management cannot prevent a repeat of the 26% cut to EBIT over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. The balance sheet is clearly the area to focus on when you are analysing debt. 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.

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. Looking at the most recent three years, Gulf Oil Lubricants India recorded free cash flow of 47% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

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 ₹3.05b, as well as more liquid assets than liabilities. So we are not troubled with Gulf Oil Lubricants India's debt use. 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 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.

When trading Gulf Oil Lubricants India or any other investment, use the platform considered by many to be the Professional's Gateway to the Worlds Market, Interactive Brokers. You get the lowest-cost* trading on stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

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. 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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com.