Is Lexus Granito (India) (NSE:LEXUS) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Lexus Granito (India) Limited (NSE:LEXUS) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.

View our latest analysis for Lexus Granito (India)

What Is Lexus Granito (India)'s Debt?

As you can see below, at the end of March 2023, Lexus Granito (India) had ₹685.9m of debt, up from ₹581.8m a year ago. Click the image for more detail. However, it also had ₹14.3m in cash, and so its net debt is ₹671.5m.

How Healthy Is Lexus Granito (India)'s Balance Sheet?

The latest balance sheet data shows that Lexus Granito (India) had liabilities of ₹722.9m due within a year, and liabilities of ₹632.5m falling due after that. Offsetting this, it had ₹14.3m in cash and ₹144.4m in receivables that were due within 12 months. So it has liabilities totalling ₹1.20b more than its cash and near-term receivables, combined.

When you consider that this deficiency exceeds the company's ₹980.6m market capitalization, you might well be inclined to review the balance sheet intently. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Lexus Granito (India) will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, Lexus Granito (India) made a loss at the EBIT level, and saw its revenue drop to ₹1.0b, which is a fall of 27%. That makes us nervous, to say the least.

Caveat Emptor

While Lexus Granito (India)'s falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost ₹83m at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it had negative free cash flow of ₹320m over the last twelve months. So suffice it to say we consider the stock to be risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 4 warning signs with Lexus Granito (India) (at least 3 which are a bit unpleasant) , and understanding them should be part of your investment process.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.