Manugraph India (NSE:MANUGRAPH) Has Debt But No Earnings; Should You Worry?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 is this debt a concern to shareholders?

When Is Debt A Problem?

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. 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. 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.

See our latest analysis for Manugraph India

What Is Manugraph India's Debt?

You can click the graphic below for the historical numbers, but it shows that Manugraph India had ₹156.9m of debt in September 2021, down from ₹254.0m, one year before. However, because it has a cash reserve of ₹100.0m, its net debt is less, at about ₹56.9m.

How Healthy Is Manugraph India's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Manugraph India had liabilities of ₹436.1m due within 12 months and liabilities of ₹154.9m due beyond that. Offsetting these obligations, it had cash of ₹100.0m as well as receivables valued at ₹34.2m due within 12 months. So its liabilities total ₹456.8m more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of ₹533.8m, so it does suggest shareholders should keep an eye on Manugraph India's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. 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 40%, to ₹428m. 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). Indeed, it lost a very considerable ₹129m at the EBIT level. 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. We would feel better if it turned its trailing twelve month loss of ₹149m into a profit. So to be blunt we do think it is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 3 warning signs for Manugraph India (2 are concerning) you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.