Does Automotive Axles (NSE:AUTOAXLES) Have A Healthy Balance Sheet?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Automotive Axles Limited (NSE:AUTOAXLES) does carry debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. 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, 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.

View our latest analysis for Automotive Axles

How Much Debt Does Automotive Axles Carry?

You can click the graphic below for the historical numbers, but it shows that Automotive Axles had ₹125.0m of debt in September 2022, down from ₹166.7m, one year before. However, it does have ₹869.0m in cash offsetting this, leading to net cash of ₹744.0m.

A Look At Automotive Axles' Liabilities

The latest balance sheet data shows that Automotive Axles had liabilities of ₹3.07b due within a year, and liabilities of ₹336.1m falling due after that. Offsetting these obligations, it had cash of ₹869.0m as well as receivables valued at ₹3.73b due within 12 months. So it actually has ₹1.19b more liquid assets than total liabilities.

This short term liquidity is a sign that Automotive Axles could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Automotive Axles boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that Automotive Axles grew its EBIT by 118% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. There's no doubt that we learn most about debt from the balance sheet. But it is Automotive Axles'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Automotive Axles 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 two years, Automotive Axles basically broke even on a free cash flow basis. Some might say that's a concern, when it comes considering how easily it would be for it to down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Automotive Axles has ₹744.0m in net cash and a decent-looking balance sheet. And we liked the look of last year's 118% year-on-year EBIT growth. So we don't think Automotive Axles's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Automotive Axles (of which 1 shouldn't be ignored!) you should know about.

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. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.