Is Laxmi Cotspin (NSE:LAXMICOT) Weighed On By Its Debt Load?

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 Laxmi Cotspin Limited (NSE:LAXMICOT) makes use of debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Laxmi Cotspin

What Is Laxmi Cotspin's Debt?

The chart below, which you can click on for greater detail, shows that Laxmi Cotspin had ₹422.8m in debt in March 2023; about the same as the year before. Net debt is about the same, since the it doesn't have much cash.

How Healthy Is Laxmi Cotspin's Balance Sheet?

The latest balance sheet data shows that Laxmi Cotspin had liabilities of ₹411.6m due within a year, and liabilities of ₹90.7m falling due after that. On the other hand, it had cash of ₹3.52m and ₹62.0m worth of receivables due within a year. So its liabilities total ₹436.8m more than the combination of its cash and short-term receivables.

When you consider that this deficiency exceeds the company's ₹392.7m market capitalization, you might well be inclined to review the balance sheet intently. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive 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.

Over 12 months, Laxmi Cotspin made a loss at the EBIT level, and saw its revenue drop to ₹1.5b, which is a fall of 20%. We would much prefer see growth.

Caveat Emptor

While Laxmi Cotspin's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping ₹86m. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. For example, we would not want to see a repeat of last year's loss of ₹89m. In the meantime, we consider the stock to be 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. Case in point: We've spotted 3 warning signs for Laxmi Cotspin you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.