Is Ganesh Housing (NSE:GANESHHOUC) A Risky Investment?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 note that Ganesh Housing Corporation Limited (NSE:GANESHHOUC) 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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Ganesh Housing

What Is Ganesh Housing's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Ganesh Housing had ₹5.39b of debt in September 2020, down from ₹5.71b, one year before. However, it also had ₹175.7m in cash, and so its net debt is ₹5.21b.

How Healthy Is Ganesh Housing's Balance Sheet?

The latest balance sheet data shows that Ganesh Housing had liabilities of ₹3.22b due within a year, and liabilities of ₹3.45b falling due after that. Offsetting this, it had ₹175.7m in cash and ₹4.57b in receivables that were due within 12 months. So its liabilities total ₹1.92b more than the combination of its cash and short-term receivables.

When you consider that this deficiency exceeds the company's ₹1.85b market capitalization, you might well be inclined to review the balance sheet intently. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. There's no doubt that we learn most about debt from the balance sheet. But it is Ganesh Housing's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Ganesh Housing had a loss before interest and tax, and actually shrunk its revenue by 76%, to ₹950m. That makes us nervous, to say the least.

Caveat Emptor

While Ganesh Housing'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 a very considerable ₹705m at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. For example, we would not want to see a repeat of last year's loss of ₹1.3b. In the meantime, we consider the stock to be risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Ganesh Housing is showing 4 warning signs in our investment analysis , and 2 of those are significant...

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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