Goenka Diamond and Jewels (NSE:GOENKA) Is Making Moderate Use Of 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. As with many other companies Goenka Diamond and Jewels Limited (NSE:GOENKA) makes use of debt. 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 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. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Goenka Diamond and Jewels

What Is Goenka Diamond and Jewels's Debt?

The chart below, which you can click on for greater detail, shows that Goenka Diamond and Jewels had ₹1.81b in debt in March 2022; about the same as the year before. Net debt is about the same, since the it doesn't have much cash.

A Look At Goenka Diamond and Jewels' Liabilities

The latest balance sheet data shows that Goenka Diamond and Jewels had liabilities of ₹5.50b due within a year, and liabilities of ₹910.0k falling due after that. Offsetting these obligations, it had cash of ₹12.0m as well as receivables valued at ₹7.57b due within 12 months. So it can boast ₹2.09b more liquid assets than total liabilities.

This luscious liquidity implies that Goenka Diamond and Jewels' balance sheet is sturdy like a giant sequoia tree. Having regard to this fact, we think its balance sheet is as strong as an ox. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Goenka Diamond and Jewels's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Goenka Diamond and Jewels had a loss before interest and tax, and actually shrunk its revenue by 78%, to ₹15m. That makes us nervous, to say the least.

Caveat Emptor

Not only did Goenka Diamond and Jewels's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost ₹23m at the EBIT level. That said, we're impressed with the strong balance sheet liquidity. That should give the business time to grow its cashflow. While the stock is probably a bit risky, there may be an opportunity if the business itself improves, allowing the company to stage a recovery. 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. Case in point: We've spotted 2 warning signs for Goenka Diamond and Jewels 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.