Celebrity Fashions (NSE:CELEBRITY) Has Debt But No Earnings; Should You Worry?

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 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 Celebrity Fashions Limited (NSE:CELEBRITY) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. If things get really bad, the lenders can take control of the business. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Celebrity Fashions

How Much Debt Does Celebrity Fashions Carry?

As you can see below, at the end of March 2021, Celebrity Fashions had ₹774.6m of debt, up from ₹678.3m a year ago. Click the image for more detail. And it doesn't have much cash, so its net debt is about the same.

A Look At Celebrity Fashions' Liabilities

The latest balance sheet data shows that Celebrity Fashions had liabilities of ₹1.14b due within a year, and liabilities of ₹403.0m falling due after that. Offsetting these obligations, it had cash of ₹8.90m as well as receivables valued at ₹548.1m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹981.5m.

The deficiency here weighs heavily on the ₹370.2m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. After all, Celebrity Fashions would likely require a major re-capitalisation if it had to pay its creditors today. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Celebrity Fashions will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Celebrity Fashions saw its revenue hold pretty steady, and it did not report positive earnings before interest and tax. While that hardly impresses, its not too bad either.

Caveat Emptor

Importantly, Celebrity Fashions had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost ₹6.5m at the EBIT level. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. That said, it is possible that the company will turn its fortunes around. But we think that is unlikely, given it is low on liquid assets, and burned through ₹67m in the last year. So we think this stock is risky, like walking through a dirty dog park with a mask on. 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. These risks can be hard to spot. Every company has them, and we've spotted 4 warning signs for Celebrity Fashions (of which 3 are a bit unpleasant!) you should know about.

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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