Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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 Man Industries (India) Limited (NSE:MANINDS) makes use of debt. But is this debt a concern to shareholders?
What Risk Does Debt Bring?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
View our latest analysis for Man Industries (India)
What Is Man Industries (India)'s Net Debt?
The image below, which you can click on for greater detail, shows that Man Industries (India) had debt of ₹317.0m at the end of September 2020, a reduction from ₹1.96b over a year. But on the other hand it also has ₹2.40b in cash, leading to a ₹2.08b net cash position.
A Look At Man Industries (India)'s Liabilities
We can see from the most recent balance sheet that Man Industries (India) had liabilities of ₹7.75b falling due within a year, and liabilities of ₹385.2m due beyond that. Offsetting these obligations, it had cash of ₹2.40b as well as receivables valued at ₹3.86b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹1.88b.
This deficit isn't so bad because Man Industries (India) is worth ₹4.13b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. Despite its noteworthy liabilities, Man Industries (India) boasts net cash, so it's fair to say it does not have a heavy debt load!
It is well worth noting that Man Industries (India)'s EBIT shot up like bamboo after rain, gaining 81% in the last twelve months. That'll make it easier to manage its debt. There's no doubt that we learn most about debt from the balance sheet. But it is Man Industries (India)'s earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. Man Industries (India) 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. Happily for any shareholders, Man Industries (India) actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.
Summing up
While Man Industries (India) does have more liabilities than liquid assets, it also has net cash of ₹2.08b. And it impressed us with free cash flow of ₹4.1b, being 155% of its EBIT. So is Man Industries (India)'s debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 4 warning signs for Man Industries (India) you should be aware of, and 1 of them can't be ignored.
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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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. 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.
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About NSEI:MANINDS
Man Industries (India)
Manufactures, processes, and trades in submerged arc welded pipes and steel products in India.
Undervalued with high growth potential.
