Is Manugraph India (NSE:MANUGRAPH) Using Too Much Debt?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 Manugraph India Limited (NSE:MANUGRAPH) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Manugraph India

What Is Manugraph India's Debt?

As you can see below, at the end of March 2021, Manugraph India had ₹188.5m of debt, up from ₹91.1m a year ago. Click the image for more detail. On the flip side, it has ₹113.7m in cash leading to net debt of about ₹74.8m.

A Look At Manugraph India's Liabilities

Zooming in on the latest balance sheet data, we can see that Manugraph India had liabilities of ₹449.6m due within 12 months and liabilities of ₹153.4m due beyond that. On the other hand, it had cash of ₹113.7m and ₹43.3m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹446.0m.

This is a mountain of leverage relative to its market capitalization of ₹453.8m. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. There's no doubt that we learn most about debt from the balance sheet. But it is Manugraph India's earnings that will influence how the balance sheet holds up in the future. 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 64%, to ₹304m. To be frank that doesn't bode well.

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). Its EBIT loss was a whopping ₹171m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled ₹220m in negative free cash flow over the last twelve months. So in short it's a really risky stock. 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. Case in point: We've spotted 4 warning signs for Manugraph India you should be aware of, and 3 of them are a bit unpleasant.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.
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