Does GP Petroleums (NSE: GULFPETRO) have a healthy balance sheet?
Berkshire Hathaway’s Charlie Munger-backed external fund manager Li Lu is quick to say this when he says “The biggest risk in investing is not price volatility, but if you will suffer a loss. permanent capital “. So it can be obvious that you need to consider debt, when you think about how risky a given stock is, because too much debt can sink a business. We can see that GP Petroleums Limited (NSE: GULFPETRO) uses debt in its business. But should shareholders be worried about its use of debt?
Why Does Debt Bring Risk?
Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, then it exists at their mercy. If things really go wrong, lenders can take over the business. While it’s not too common, we often see indebted companies continually diluting their shareholders because lenders are forcing them to raise capital at a ridiculous price. By replacing dilution, however, debt can be a very good tool for companies that need capital to invest in growth at high rates of return. When we think of a business’s use of debt, we first look at cash flow and debt together.
Check out our latest review for GP Petroleums
What is GP Petroleums’ net debt?
You can click on the graph below for historical figures, but it shows that GP Petroleums had 483.4 million yen in debt in September 2021, up from 676.1 million yen a year earlier. And he doesn’t have a lot of cash, so his net debt is about the same.
How healthy is GP Petroleums’ balance sheet?
We can see from the most recent balance sheet that GP Petroleums had a liability of 814.1 million yen due within one year and a liability of 70.7 million yen due beyond. In return, he had 226.0 k in cash and 1.03 billion in receivables due within 12 months. So it actually has â¹ 145.5m Following liquid assets as total liabilities.
This surplus suggests that GP Petroleums has a prudent balance sheet and could probably eliminate its debt without too much difficulty.
In order to measure a company’s debt relative to its profits, we calculate its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and its profit before interest and taxes (EBIT) divided by its interest. debtors (its interest coverage). In this way, we consider both the absolute amount of debt, as well as the interest rates paid on it.
GP Petroleums’ net debt of 2.3 times EBITDA suggests a graceful use of debt. And the fact that its last twelve months of EBIT was 9.3 times its interest expense ties in with that theme. Unfortunately, GP Petroleums EBIT actually fell 6.0% over the past year. If incomes continue to decline, managing that debt will be difficult, like delivering hot soup on a unicycle. When analyzing debt levels, the balance sheet is the obvious starting point. But it is the profits of GP Petroleums that will influence the balance sheet in the future. So if you want to know more about its profits, it might be worth checking out this long term profit trend chart.
Finally, while the IRS may love accounting profits, lenders only accept hard cash. We therefore always check how much of this EBIT is converted into free cash flow. Fortunately for all shareholders, GP Petroleums has actually generated more free cash flow than EBIT over the past three years. This kind of solid silver generation warms our hearts like a puppy in a bumblebee costume.
Our point of view
Fortunately, GP Petroleums’ impressive conversion of EBIT into free cash flow means that it has the upper hand over its debt. But frankly, we think its EBIT growth rate undermines that impression a bit. When we consider the range of factors above, it looks like GP Petroleums is being pretty reasonable with its use of debt. While this carries some risk, it can also improve returns for shareholders. There is no doubt that we learn the most about debt from the balance sheet. But at the end of the day, every business can contain risks that exist off the balance sheet. We have identified 4 warning signs with GP Petroleums (at least 1 which is a little worrying), and understanding them should be part of your investment process.
At the end of the day, it’s often best to focus on businesses that don’t have net debt. You can access our special list of these companies (all with a history of profit growth). It’s free.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.
Do you have any feedback on this item? Are you worried about the content? Get in touch with us directly. You can also send an email to the editorial team (at) simplywallst.com.