Is Laxmi Cotspin (NSE:LAXMICOT) A Risky Investment?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. Importantly, Laxmi Cotspin Limited (NSE:LAXMICOT) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Laxmi Cotspin

What Is Laxmi Cotspin's Debt?

As you can see below, at the end of September 2023, Laxmi Cotspin had ₹372.2m of debt, up from ₹286.7m a year ago. Click the image for more detail. Net debt is about the same, since the it doesn't have much cash.

How Healthy Is Laxmi Cotspin's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Laxmi Cotspin had liabilities of ₹322.1m due within 12 months and liabilities of ₹124.8m due beyond that. Offsetting these obligations, it had cash of ₹6.38m as well as receivables valued at ₹26.7m due within 12 months. So its liabilities total ₹413.8m more than the combination of its cash and short-term receivables.

This is a mountain of leverage relative to its market capitalization of ₹572.7m. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. When analysing debt levels, the balance sheet is the obvious place to start. But it is Laxmi Cotspin's earnings that will influence how the balance sheet holds up in the future. 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 Laxmi Cotspin had a loss before interest and tax, and actually shrunk its revenue by 5.7%, to ₹1.5b. That's not what we would hope to see.

Caveat Emptor

Importantly, Laxmi Cotspin had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost ₹41m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled ₹64m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 4 warning signs for Laxmi Cotspin that you should be aware of before investing here.

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.