Here's Why Lypsa Gems & Jewellery (NSE:LYPSAGEMS) Can Afford Some 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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Lypsa Gems & Jewellery Limited (NSE:LYPSAGEMS) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. 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 step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Lypsa Gems & Jewellery

What Is Lypsa Gems & Jewellery's Debt?

You can click the graphic below for the historical numbers, but it shows that Lypsa Gems & Jewellery had ₹197.2m of debt in September 2021, down from ₹206.1m, one year before. However, it does have ₹4.19m in cash offsetting this, leading to net debt of about ₹193.0m.

How Strong Is Lypsa Gems & Jewellery's Balance Sheet?

According to the last reported balance sheet, Lypsa Gems & Jewellery had liabilities of ₹1.90b due within 12 months, and liabilities of ₹3.22m due beyond 12 months. On the other hand, it had cash of ₹4.19m and ₹2.84b worth of receivables due within a year. So it can boast ₹944.4m more liquid assets than total liabilities.

This excess liquidity is a great indication that Lypsa Gems & Jewellery's balance sheet is almost as strong as Fort Knox. 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 you can't view debt in total isolation; since Lypsa Gems & Jewellery 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 Lypsa Gems & Jewellery had a loss before interest and tax, and actually shrunk its revenue by 25%, to ₹82m. That makes us nervous, to say the least.

Caveat Emptor

While Lypsa Gems & Jewellery's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at ₹2.7m. Having said that, the balance sheet has plenty of liquid assets for now. 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. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 4 warning signs for Lypsa Gems & Jewellery (2 make us uncomfortable) you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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

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.