LGB Forge (NSE:LGBFORGE) Is Making Moderate Use Of Debt

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. Importantly, LGB Forge Limited (NSE:LGBFORGE) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for LGB Forge

What Is LGB Forge's Net Debt?

As you can see below, at the end of September 2022, LGB Forge had ₹203.7m of debt, up from ₹127.2m a year ago. Click the image for more detail. And it doesn't have much cash, so its net debt is about the same.

How Strong Is LGB Forge's Balance Sheet?

We can see from the most recent balance sheet that LGB Forge had liabilities of ₹369.7m falling due within a year, and liabilities of ₹51.3m due beyond that. On the other hand, it had cash of ₹2.99m and ₹331.5m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹86.5m.

Given LGB Forge has a market capitalization of ₹1.82b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. When analysing debt levels, the balance sheet is the obvious place to start. But it is LGB Forge'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.

Over 12 months, LGB Forge made a loss at the EBIT level, and saw its revenue drop to ₹1.2b, which is a fall of 8.2%. That's not what we would hope to see.

Caveat Emptor

Importantly, LGB Forge had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at ₹57m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through ₹24m of cash over the last year. So suffice it to say we do consider the stock to be risky. 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 - LGB Forge has 1 warning sign we think you should be aware of.

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.