These 4 Measures Indicate That Manaksia (NSE:MANAKSIA) Is Using Debt Safely

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We can see that Manaksia Limited (NSE:MANAKSIA) does use debt in its business. But the more important question is: how much risk is that debt creating?

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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.

View our latest analysis for Manaksia

What Is Manaksia's Debt?

As you can see below, Manaksia had ₹132.4m of debt at March 2020, down from ₹342.9m a year prior. However, it does have ₹3.97b in cash offsetting this, leading to net cash of ₹3.84b.

How Strong Is Manaksia's Balance Sheet?

We can see from the most recent balance sheet that Manaksia had liabilities of ₹1.05b falling due within a year, and liabilities of ₹474.4m due beyond that. Offsetting this, it had ₹3.97b in cash and ₹1.23b in receivables that were due within 12 months. So it actually has ₹3.68b more liquid assets than total liabilities.

This surplus liquidity suggests that Manaksia's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. 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!

It is just as well that Manaksia's load is not too heavy, because its EBIT was down 69% over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. There's no doubt that we learn most about debt from the balance sheet. But it is Manaksia'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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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. Happily for any shareholders, Manaksia 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 it is always sensible to investigate a company's debt, in this case Manaksia has ₹3.84b in net cash and a strong balance sheet. The cherry on top was that in converted 139% of that EBIT to free cash flow, bringing in -₹399.1m. So is Manaksia's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Like risks, for instance. Every company has them, and we've spotted 3 warning signs for Manaksia (of which 1 is concerning!) you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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