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. Importantly, Gulf Oil Lubricants India Limited (NSE:GULFOILLUB) does carry debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Gulf Oil Lubricants India

How Much Debt Does Gulf Oil Lubricants India Carry?

As you can see below, Gulf Oil Lubricants India had ₹1.98b of debt at March 2021, down from ₹3.54b a year prior. But it also has ₹4.98b in cash to offset that, meaning it has ₹3.00b net cash.

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

According to the last reported balance sheet, Gulf Oil Lubricants India had liabilities of ₹5.52b due within 12 months, and liabilities of ₹246.3m due beyond 12 months. On the other hand, it had cash of ₹4.98b and ₹1.97b worth of receivables due within a year. So it actually has ₹1.19b 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. Succinctly put, Gulf Oil Lubricants India boasts net cash, so it's fair to say it does not have a heavy debt load!

And we also note warmly that Gulf Oil Lubricants India grew its EBIT by 12% last year, making its debt load easier to handle. 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. Gulf Oil Lubricants India may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. 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 it is always sensible to investigate a company's debt, in this case Gulf Oil Lubricants India has ₹3.00b in net cash and a decent-looking balance sheet. 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. 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.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.
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