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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Manaksia Limited (NSE:MANAKSIA) makes use of debt. But the more important question is: how much risk is that debt creating?
When Is Debt Dangerous?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. 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. 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.
What Is Manaksia's Net Debt?
The image below, which you can click on for greater detail, shows that Manaksia had debt of ₹354.0m at the end of March 2019, a reduction from ₹521.8m over a year. However, it does have ₹5.37b in cash offsetting this, leading to net cash of ₹5.01b.
How Healthy Is Manaksia's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Manaksia had liabilities of ₹1.53b due within 12 months and liabilities of ₹487.3m due beyond that. Offsetting this, it had ₹5.37b in cash and ₹1.55b in receivables that were due within 12 months. So it actually has ₹4.90b more liquid assets than total liabilities.
This surplus strongly suggests that Manaksia has a rock-solid balance sheet (and the debt is of no concern whatsoever). On this basis we think its balance sheet is strong like a sleek panther or even a proud lion. Succinctly put, Manaksia boasts net cash, so it's fair to say it does not have a heavy debt load!
The bad news is that Manaksia saw its EBIT decline by 14% over the last year. If that sort of decline is not arrested, then the managing its debt will be harder than selling broccoli flavoured ice-cream for a premium. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Manaksia will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Manaksia has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, Manaksia actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.
While it is always sensible to investigate a company's debt, in this case Manaksia has ₹5.0b in net cash and a strong balance sheet. And it impressed us with free cash flow of ₹2.6b, being 362% of its EBIT. So we don't think Manaksia's use of debt is risky. Given Manaksia has a strong balance sheet is profitable and pays a dividend, it would be good to know how fast its dividends are growing, if at all. You can find out instantly by clicking this link.
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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