Lypsa Gems & Jewellery (NSE:LYPSAGEMS) Is Using Debt Safely

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. Importantly, Lypsa Gems & Jewellery Limited (NSE:LYPSAGEMS) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Lypsa Gems & Jewellery

What Is Lypsa Gems & Jewellery's Net Debt?

The image below, which you can click on for greater detail, shows that Lypsa Gems & Jewellery had debt of ₹133.9m at the end of March 2022, a reduction from ₹206.0m over a year. However, because it has a cash reserve of ₹5.05m, its net debt is less, at about ₹128.8m.

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

According to the last reported balance sheet, Lypsa Gems & Jewellery had liabilities of ₹1.76b due within 12 months, and liabilities of ₹2.94m due beyond 12 months. Offsetting this, it had ₹5.05m in cash and ₹2.73b in receivables that were due within 12 months. So it actually has ₹971.9m 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. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. When analysing debt levels, the balance sheet is the obvious place to start. But it is Lypsa Gems & Jewellery's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Lypsa Gems & Jewellery reported revenue of ₹140m, which is a gain of 67%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

Despite the top line growth, Lypsa Gems & Jewellery still had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost ₹1.1m at the EBIT level. Having said that, the balance sheet has plenty of liquid assets for now. That should give the business time to grow its cashflow. 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. 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 are concerning) you should be aware of.

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.

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.