Is Manugraph India (NSE:MANUGRAPH) A Risky Investment?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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, Manugraph India Limited (NSE:MANUGRAPH) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Manugraph India

How Much Debt Does Manugraph India Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Manugraph India had ₹206.7m of debt, an increase on ₹105.0m, over one year. However, it also had ₹18.4m in cash, and so its net debt is ₹188.3m.

A Look At Manugraph India's Liabilities

According to the last reported balance sheet, Manugraph India had liabilities of ₹597.6m due within 12 months, and liabilities of ₹211.1m due beyond 12 months. Offsetting this, it had ₹18.4m in cash and ₹16.1m in receivables that were due within 12 months. So it has liabilities totalling ₹774.3m more than its cash and near-term receivables, combined.

Given this deficit is actually higher than the company's market capitalization of ₹563.3m, we think shareholders really should watch Manugraph India's debt levels, like a parent watching their child ride a bike for the first time. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Manugraph 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.

In the last year Manugraph India had a loss before interest and tax, and actually shrunk its revenue by 17%, to ₹628m. We would much prefer see growth.

Caveat Emptor

Not only did Manugraph India's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable ₹151m at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. For example, we would not want to see a repeat of last year's loss of ₹286m. And until that time we think this is a risky stock. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Manugraph India has 1 warning sign we think you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.