Palash Securities (NSE:PALASHSECU) Is Carrying A Fair Bit Of 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.' 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. We can see that Palash Securities Limited (NSE:PALASHSECU) does use debt in its business. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Palash Securities

What Is Palash Securities's Net Debt?

The chart below, which you can click on for greater detail, shows that Palash Securities had ₹231.2m in debt in March 2022; about the same as the year before. However, because it has a cash reserve of ₹51.2m, its net debt is less, at about ₹180.0m.

How Strong Is Palash Securities' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Palash Securities had liabilities of ₹320.6m due within 12 months and liabilities of ₹215.5m due beyond that. On the other hand, it had cash of ₹51.2m and ₹69.1m worth of receivables due within a year. So its liabilities total ₹415.7m more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Palash Securities has a market capitalization of ₹1.08b, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Palash Securities 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.

In the last year Palash Securities had a loss before interest and tax, and actually shrunk its revenue by 5.6%, to ₹556m. That's not what we would hope to see.

Caveat Emptor

Importantly, Palash Securities had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping ₹112m. 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. We would feel better if it turned its trailing twelve month loss of ₹85m into a profit. So we do think this stock is quite 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. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Palash Securities (of which 1 is a bit concerning!) you should know about.

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.