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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Lumax Auto Technologies Limited (NSE:LUMAXTECH) does carry debt. But is this debt a concern to shareholders?
When Is Debt A Problem?
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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.
What Is Lumax Auto Technologies's Net Debt?
As you can see below, at the end of March 2019, Lumax Auto Technologies had ₹683.2m of debt, up from ₹107.8m a year ago. Click the image for more detail. But it also has ₹748.7m in cash to offset that, meaning it has ₹65.5m net cash.
A Look At Lumax Auto Technologies's Liabilities
Zooming in on the latest balance sheet data, we can see that Lumax Auto Technologies had liabilities of ₹3.71b due within 12 months and liabilities of ₹369.7m due beyond that. Offsetting this, it had ₹748.7m in cash and ₹2.79b in receivables that were due within 12 months. So its liabilities total ₹537.4m more than the combination of its cash and short-term receivables.
Given Lumax Auto Technologies has a market capitalization of ₹6.86b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Lumax Auto Technologies boasts net cash, so it's fair to say it does not have a heavy debt load!
On the other hand, Lumax Auto Technologies's EBIT dived 13%, over the last year. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Lumax Auto Technologies's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Lumax Auto Technologies may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. In the last three years, Lumax Auto Technologies created free cash flow amounting to 8.9% of its EBIT, an uninspiring performance. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.
While it is always sensible to look at a company's total liabilities, it is very reassuring that Lumax Auto Technologies has ₹65.5m in net cash. So we are not troubled with Lumax Auto Technologies's debt use. We'd be motivated to research the stock further if we found out that Lumax Auto Technologies insiders have bought shares recently. If you would too, then you're in luck, since today we're sharing our list of reported insider transactions for free.
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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