Does Laxmi Cotspin (NSE:LAXMICOT) Have A Healthy Balance Sheet?

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.' 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. As with many other companies Laxmi Cotspin Limited (NSE:LAXMICOT) makes use of debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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 Laxmi Cotspin

How Much Debt Does Laxmi Cotspin Carry?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Laxmi Cotspin had ₹501.8m of debt, an increase on ₹422.8m, over one year. Net debt is about the same, since the it doesn't have much cash.

How Strong Is Laxmi Cotspin's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Laxmi Cotspin had liabilities of ₹501.2m due within 12 months and liabilities of ₹69.6m due beyond that. Offsetting these obligations, it had cash of ₹10.0m as well as receivables valued at ₹38.3m due within 12 months. So it has liabilities totalling ₹522.4m more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of ₹624.5m, so it does suggest shareholders should keep an eye on Laxmi Cotspin's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Laxmi Cotspin 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.

Over 12 months, Laxmi Cotspin saw its revenue hold pretty steady, and it did not report positive earnings before interest and tax. While that's not too bad, we'd prefer see growth.

Caveat Emptor

Importantly, Laxmi Cotspin had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost ₹17m 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. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through ₹92m of cash over the last year. So in short it's a really risky stock. 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 Laxmi Cotspin (of which 3 make us uncomfortable!) you should know about.

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. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com