Goenka Diamond and Jewels (NSE:GOENKA) Is Carrying A Fair Bit Of Debt

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Goenka Diamond and Jewels Limited (NSE:GOENKA) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Goenka Diamond and Jewels

What Is Goenka Diamond and Jewels's Net Debt?

The chart below, which you can click on for greater detail, shows that Goenka Diamond and Jewels had ₹1.91b in debt in March 2021; about the same as the year before. However, because it has a cash reserve of ₹144.8m, its net debt is less, at about ₹1.77b.

How Healthy Is Goenka Diamond and Jewels' Balance Sheet?

The latest balance sheet data shows that Goenka Diamond and Jewels had liabilities of ₹5.49b due within a year, and liabilities of ₹992.0k falling due after that. On the other hand, it had cash of ₹144.8m and ₹7.55b worth of receivables due within a year. So it can boast ₹2.20b more liquid assets than total liabilities.

This surplus liquidity suggests that Goenka Diamond and Jewels' balance sheet could take a hit just as well as Homer Simpson's head can take a punch. On this view, lenders should feel as safe as the beloved of a black-belt karate master. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Goenka Diamond and Jewels 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, Goenka Diamond and Jewels made a loss at the EBIT level, and saw its revenue drop to ₹46m, which is a fall of 72%. That makes us nervous, to say the least.

Caveat Emptor

While Goenka Diamond and Jewels's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost a very considerable ₹102m at the EBIT level. Having said that, the balance sheet has plenty of liquid assets for now. That should give the business time to grow its cashflow. The company is risky because it will grow into the future to get to profitability and free cash flow. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 3 warning signs for Goenka Diamond and Jewels (2 shouldn't be ignored) 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. 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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