Warren Buffett said: “Volatility is far from synonymous with risk”. So it can be obvious that you need to consider debt, when you think about how risky a given stock is because too much debt can sink a business. We note that Goenka Diamond and Jewels Limited (NSE: GOENKA) has debt on its balance sheet. But the most important question is: what risk does this debt create?
When is debt a problem?
Debt helps a business until the business struggles to repay it, either with new capital or with free cash flow. If things really go wrong, lenders can take over the business. However, a more common (but still painful) scenario is that he has to raise new equity at low cost, thereby constantly diluting shareholders. Of course, the advantage of debt is that it often represents cheap capital, especially when it replaces dilution in a business with the ability to reinvest at high rates of return. The first step in examining a company’s debt levels is to consider its cash flow and debt together.
Check out our latest review for Goenka Diamond and Jewels
How much debt do Goenka diamonds and jewelry carry?
The image below, which you can click for more details, shows that Goenka Diamond and Jewels had a debt of 1.83 billion yen at the end of September 2021, a reduction from 1.91 billion yen. yen over one year. And he doesn’t have a lot of cash, so his net debt is about the same.
A look at the responsibilities of Goenka Diamond and Jewels
According to the latest published balance sheet, Goenka Diamond and Jewels had liabilities of 5.48 billion yen due within 12 months and liabilities of 992.0k yen beyond 12 months. In compensation for these obligations, he had cash of 10.6 million as well as receivables valued at 7.56 million maturing within 12 months. So it actually has â¹ 2.09b Following liquid assets as total liabilities.
This surplus strongly suggests that Goenka Diamond and Jewels has a rock solid balance sheet (and debt is not of concern). From this point of view, lenders should feel as secure as the beloved of a black belt karate master. The balance sheet is clearly the area to focus on when analyzing debt. But you can’t look at debt in isolation; since Goenka Diamond and Jewels will need income to repay this debt. So if you want to know more about its profits, it might be worth checking out this long term profit trend chart.
In the past year, Goenka Diamond and Jewels recorded a loss before interest and taxes and in fact reduced its income by 29%, to 55 million yen. To be frank, that doesn’t bode well.
While Goenka Diamond and Jewels’ decline in earnings is about as heartwarming as a wet hedge, its earnings before interest and taxes (EBIT) can be said to be even less attractive. Indeed, it lost a very considerable amount of 86 million euros at the EBIT level. That said, the balance sheet has a lot of liquid assets at the moment. This will give the company time and space to grow and develop its activities according to its needs. The business is risky because it will grow in the future to achieve profitability and free cash flow. The balance sheet is clearly the area to focus on when analyzing debt. But at the end of the day, every business can contain risks that exist off the balance sheet. We have identified 3 warning signs with Goenka Diamond and Jewels, and understanding them should be part of your investment process.
At the end of the day, it’s often best to focus on businesses that don’t have net debt. You can access our special list of these companies (all with a history of profit growth). It’s free.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.
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