Would Goenka Diamond and Jewels (NSE:GOENKA) Be Better Off With Less Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Goenka Diamond and Jewels Limited (NSE:GOENKA) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Goenka Diamond and Jewels

How Much Debt Does Goenka Diamond and Jewels Carry?

The image below, which you can click on for greater detail, shows that Goenka Diamond and Jewels had debt of ₹1.83b at the end of September 2021, a reduction from ₹1.91b over a year. And it doesn't have much cash, so its net debt is about the same.

A Look At Goenka Diamond and Jewels' Liabilities

According to the last reported balance sheet, Goenka Diamond and Jewels had liabilities of ₹5.48b due within 12 months, and liabilities of ₹992.0k due beyond 12 months. Offsetting these obligations, it had cash of ₹10.6m as well as receivables valued at ₹7.56b due within 12 months. So it actually has ₹2.09b more liquid assets than total liabilities.

This surplus strongly suggests that Goenka Diamond and Jewels has a rock-solid balance sheet (and the debt is of no concern whatsoever). On this view, lenders should feel as safe as the beloved of a black-belt karate master. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Goenka Diamond and Jewels will need earnings to service that debt. 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 Goenka Diamond and Jewels had a loss before interest and tax, and actually shrunk its revenue by 29%, to ₹55m. To be frank that doesn't bode well.

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 ₹86m at the EBIT level. Having said that, the balance sheet has plenty of liquid assets for now. That will give the company some time and space to grow and develop its business as need be. 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. We've identified 3 warning signs with Goenka Diamond and Jewels , and understanding them should be part of your investment process.

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.

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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