Would Nakoda Group of Industries (NSE:NGIL) Be Better Off With Less Debt?

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.' 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. Importantly, Nakoda Group of Industries Limited (NSE:NGIL) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Nakoda Group of Industries

How Much Debt Does Nakoda Group of Industries Carry?

As you can see below, Nakoda Group of Industries had ₹166.7m of debt at September 2024, down from ₹210.2m a year prior. However, because it has a cash reserve of ₹7.17m, its net debt is less, at about ₹159.5m.

How Healthy Is Nakoda Group of Industries' Balance Sheet?

We can see from the most recent balance sheet that Nakoda Group of Industries had liabilities of ₹148.7m falling due within a year, and liabilities of ₹40.8m due beyond that. On the other hand, it had cash of ₹7.17m and ₹49.3m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹133.1m.

Since publicly traded Nakoda Group of Industries shares are worth a total of ₹725.4m, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Nakoda Group of Industries will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Nakoda Group of Industries had a loss before interest and tax, and actually shrunk its revenue by 17%, to ₹432m. We would much prefer see growth.

Caveat Emptor

While Nakoda Group of Industries'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 ₹22m. 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. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through ₹45m of cash over the last year. So in short it's a really risky stock. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 4 warning signs with Nakoda Group of Industries , and understanding them should be part of your investment process.

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.