Mangalam Global Enterprise (NSE:MGEL) Is Making Moderate Use Of Debt

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.' 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, Mangalam Global Enterprise Limited (NSE:MGEL) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Mangalam Global Enterprise

What Is Mangalam Global Enterprise's Debt?

As you can see below, at the end of September 2022, Mangalam Global Enterprise had ₹1.77b of debt, up from ₹1.12b a year ago. Click the image for more detail. However, it does have ₹103.9m in cash offsetting this, leading to net debt of about ₹1.67b.

How Healthy Is Mangalam Global Enterprise's Balance Sheet?

We can see from the most recent balance sheet that Mangalam Global Enterprise had liabilities of ₹1.86b falling due within a year, and liabilities of ₹323.8m due beyond that. On the other hand, it had cash of ₹103.9m and ₹1.18b worth of receivables due within a year. So it has liabilities totalling ₹900.3m more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Mangalam Global Enterprise has a market capitalization of ₹4.17b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. There's no doubt that we learn most about debt from the balance sheet. But it is Mangalam Global Enterprise'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, Mangalam Global Enterprise reported revenue of ₹14b, which is a gain of 52%, 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

Even though Mangalam Global Enterprise managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. Indeed, it lost ₹6.0m 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 ₹1.0b in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 6 warning signs with Mangalam Global Enterprise (at least 3 which are a bit unpleasant) , and understanding them should be part of your investment process.

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.

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