Health Check: How Prudently Does Prajay Engineers Syndicate (NSE:PRAENG) Use Debt?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 Prajay Engineers Syndicate Limited (NSE:PRAENG) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. 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 step when considering a company's debt levels is to consider its cash and debt together.

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What Is Prajay Engineers Syndicate's Debt?

The image below, which you can click on for greater detail, shows that at September 2022 Prajay Engineers Syndicate had debt of ₹1.73b, up from ₹1.65b in one year. On the flip side, it has ₹35.8m in cash leading to net debt of about ₹1.70b.

How Healthy Is Prajay Engineers Syndicate's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Prajay Engineers Syndicate had liabilities of ₹4.17b due within 12 months and liabilities of ₹1.68b due beyond that. Offsetting these obligations, it had cash of ₹35.8m as well as receivables valued at ₹1.67b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹4.13b.

This deficit casts a shadow over the ₹1.13b company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, Prajay Engineers Syndicate would likely require a major re-capitalisation if it had to pay its creditors today. There's no doubt that we learn most about debt from the balance sheet. But it is Prajay Engineers Syndicate'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, Prajay Engineers Syndicate reported revenue of ₹783m, which is a gain of 39%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Even though Prajay Engineers Syndicate managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. Indeed, it lost ₹31m at the EBIT level. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. That said, it is possible that the company will turn its fortunes around. Nevertheless, we would not bet on it given that it vaporized ₹19m in cash over the last twelve months, and it doesn't have much by way of liquid assets. So we think this stock is risky, like walking through a dirty dog park with a mask on. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 2 warning signs for Prajay Engineers Syndicate you should be aware of, and 1 of them is concerning.

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.