Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Goa Carbon Limited (NSE:GOACARBON) does carry debt. But the more important question is: how much risk is that debt creating?
Why Does Debt Bring Risk?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
View our latest analysis for Goa Carbon
How Much Debt Does Goa Carbon Carry?
As you can see below, at the end of September 2020, Goa Carbon had ₹150.0m of debt, up from none a year ago. Click the image for more detail. However, it also had ₹101.4m in cash, and so its net debt is ₹48.6m.
How Strong Is Goa Carbon's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Goa Carbon had liabilities of ₹1.10b due within 12 months and no liabilities due beyond that. Offsetting this, it had ₹101.4m in cash and ₹451.3m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹549.9m.
This deficit isn't so bad because Goa Carbon is worth ₹2.61b, 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. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Goa Carbon'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.
In the last year Goa Carbon had a loss before interest and tax, and actually shrunk its revenue by 31%, to ₹3.2b. That makes us nervous, to say the least.
Caveat Emptor
Not only did Goa Carbon's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost ₹94m 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 ₹228m in negative free cash flow over the last twelve months. So in short it's a really risky stock. 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. Be aware that Goa Carbon is showing 4 warning signs in our investment analysis , and 2 of those are potentially serious...
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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This article by Simply Wall St is general in nature. 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.
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About NSEI:GOACARBON
Goa Carbon
Manufactures, markets, and sells calcined petroleum coke in India.
Average dividend payer slight.
