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Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Gulf Oil Lubricants India Limited (NSE:GULFOILLUB) does use debt in its business. But the more important question is: how much risk is that debt creating?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, plenty of companies use debt to fund growth, without any negative consequences. 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
What Is Gulf Oil Lubricants India's Debt?
The image below, which you can click on for greater detail, shows that at March 2019 Gulf Oil Lubricants India had debt of ₹2.83b, up from ₹2.48b in one year. But it also has ₹2.94b in cash to offset that, meaning it has ₹104.0m net cash.
How Strong Is Gulf Oil Lubricants India's Balance Sheet?
According to the last reported balance sheet, Gulf Oil Lubricants India had liabilities of ₹5.31b due within 12 months, and liabilities of ₹243.4m due beyond 12 months. On the other hand, it had cash of ₹2.94b and ₹1.52b worth of receivables due within a year. So it has liabilities totalling ₹1.10b more than its cash and near-term receivables, combined.
Since publicly traded Gulf Oil Lubricants India shares are worth a total of ₹43.2b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Gulf Oil Lubricants India also has more cash than debt, so we're pretty confident it can manage its debt safely.
And we also note warmly that Gulf Oil Lubricants India grew its EBIT by 14% 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 ultimately the future profitability of the business will decide if Gulf Oil Lubricants India can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.