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The external fund manager backed by Berkshire Hathaway’s Charlie Munger, Li Lu, makes no bones about it when he says ‘The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. AXISCADES Engineering Technologies Limited (NSE:AXISCADES) makes use of debt. But is this debt a concern to shareholders?
When Is Debt A Problem?
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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company’s use of debt, we first look at cash and debt together.
What Is AXISCADES Engineering Technologies’s Debt?
You can click the graphic below for the historical numbers, but it shows that AXISCADES Engineering Technologies had ₹1.32b of debt in March 2019, down from ₹1.38b, one year before However, it does have ₹1.08b in cash offsetting this, leading to net debt of about ₹236.1m.
How Strong Is AXISCADES Engineering Technologies’s Balance Sheet?
The latest balance sheet data shows that AXISCADES Engineering Technologies had liabilities of ₹3.25b due within a year, and liabilities of ₹1.57b falling due after that. On the other hand, it had cash of ₹1.08b and ₹1.56b worth of receivables due within a year. So it has liabilities totalling ₹2.18b more than its cash and near-term receivables, combined.
This is a mountain of leverage relative to its market capitalization of ₹2.21b. So should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. Either way, since AXISCADES Engineering Technologies does have more debt than cash, it’s worth keeping an eye on its balance sheet. The balance sheet is clearly the area to focus on when you are analysing debt. But it is AXISCADES Engineering Technologies’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.
In the last year AXISCADES Engineering Technologies managed to grow its revenue by 17%, to ₹6.1b. We usually like to see faster growth from unprofitable companies, but each to their own.
Importantly, AXISCADES Engineering Technologies had negative earnings before interest and tax (EBIT), over the last year. To be specific the EBIT loss came in at ₹78m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn’t help that it burned through ₹547m of cash over the last year. So suffice it to say we consider the stock very risky. For riskier companies like AXISCADES Engineering Technologies I always like to keep an eye on whether insiders are buying or selling. So click here if you want to find out for yourself.
If, after all that, you’re more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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If you spot an error that warrants correction, please contact the editor at email@example.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.