Health Check: How Prudently Does PC Jeweller (NSE:PCJEWELLER) Use 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 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. As with many other companies PC Jeweller Limited (NSE:PCJEWELLER) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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.

See our latest analysis for PC Jeweller

How Much Debt Does PC Jeweller Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2023 PC Jeweller had ₹38.4b of debt, an increase on ₹34.7b, over one year. And it doesn't have much cash, so its net debt is about the same.

How Healthy Is PC Jeweller's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that PC Jeweller had liabilities of ₹40.6b due within 12 months and liabilities of ₹458.0m due beyond that. On the other hand, it had cash of ₹164.8m and ₹81.8m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹40.8b.

The deficiency here weighs heavily on the ₹26.2b company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. After all, PC Jeweller would likely require a major re-capitalisation if it had to pay its creditors today. The balance sheet is clearly the area to focus on when you are analysing debt. But it is PC Jeweller'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, PC Jeweller made a loss at the EBIT level, and saw its revenue drop to ₹15b, which is a fall of 31%. To be frank that doesn't bode well.

Caveat Emptor

Not only did PC Jeweller's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at ₹1.1b. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. It's fair to say the loss of ₹6.7b didn't encourage us either; we'd like to see a profit. 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 PC Jeweller is showing 2 warning signs in our investment analysis , you should know about...

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. 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.