Would Nakoda Group of Industries (NSE:NGILPP1) 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.' 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, Nakoda Group of Industries Limited (NSE:NGILPP1) does carry debt. But is this debt a concern to shareholders?

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When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

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, it does have ₹7.17m in cash offsetting this, leading to net debt of about ₹159.5m.

How Healthy Is Nakoda Group of Industries' Balance Sheet?

According to the last reported balance sheet, Nakoda Group of Industries had liabilities of ₹148.7m due within 12 months, and liabilities of ₹40.8m due beyond 12 months. Offsetting these obligations, it had cash of ₹7.17m as well as receivables valued at ₹49.3m due within 12 months. So it has liabilities totalling ₹133.1m more than its cash and near-term receivables, combined.

This deficit isn't so bad because Nakoda Group of Industries is worth ₹632.6m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Nakoda Group of Industries 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.

Check out our latest analysis for Nakoda Group of Industries

In the last year Nakoda Group of Industries had a loss before interest and tax, and actually shrunk its revenue by 13%, to ₹429m. 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 ₹16m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much 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 ₹45m of cash over the last year. So suffice it to say we consider the stock very risky. 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. These risks can be hard to spot. Every company has them, and we've spotted 6 warning signs for Nakoda Group of Industries (of which 5 are potentially serious!) you should know about.

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.