Is Automotive Axles (NSE:AUTOAXLES) A Risky Investment?

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.' 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 Automotive Axles Limited (NSE:AUTOAXLES) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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 think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Automotive Axles

What Is Automotive Axles's Debt?

You can click the graphic below for the historical numbers, but it shows that Automotive Axles had ₹166.7m of debt in September 2020, down from ₹608.3m, one year before. However, it does have ₹1.17b in cash offsetting this, leading to net cash of ₹1.01b.

A Look At Automotive Axles' Liabilities

We can see from the most recent balance sheet that Automotive Axles had liabilities of ₹1.89b falling due within a year, and liabilities of ₹314.2m due beyond that. Offsetting this, it had ₹1.17b in cash and ₹1.01b in receivables that were due within 12 months. So these liquid assets roughly match the total liabilities.

Having regard to Automotive Axles' size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the ₹16.0b company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, Automotive Axles also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Automotive Axles 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.

Over 12 months, Automotive Axles made a loss at the EBIT level, and saw its revenue drop to ₹5.4b, which is a fall of 66%. That makes us nervous, to say the least.

So How Risky Is Automotive Axles?

While Automotive Axles lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow ₹1.0b. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Consider for instance, the ever-present spectre of investment risk. We've identified 2 warning signs with Automotive Axles , and understanding them should be part of your investment process.

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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