Is Nakoda Group of Industries (NSE:NGILPP) Using Too Much Debt?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We note that Nakoda Group of Industries Limited (NSE:NGILPP) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Nakoda Group of Industries

How Much Debt Does Nakoda Group of Industries Carry?

You can click the graphic below for the historical numbers, but it shows that Nakoda Group of Industries had ₹182.7m of debt in March 2024, down from ₹220.0m, one year before. Net debt is about the same, since the it doesn't have much cash.

How Healthy Is Nakoda Group of Industries' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Nakoda Group of Industries had liabilities of ₹169.8m due within 12 months and liabilities of ₹43.3m due beyond that. On the other hand, it had cash of ₹2.97m and ₹90.8m worth of receivables due within a year. So its liabilities total ₹119.4m more than the combination of its cash and short-term receivables.

Since publicly traded Nakoda Group of Industries shares are worth a total of ₹728.3m, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Nakoda Group of Industries'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, Nakoda Group of Industries made a loss at the EBIT level, and saw its revenue drop to ₹471m, which is a fall of 14%. 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. Indeed, it lost ₹7.0m 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. However, it doesn't help that it burned through ₹2.2m of cash over the last year. So suffice it to say we do consider the stock to be risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 6 warning signs we've spotted with Nakoda Group of Industries .

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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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.

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