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

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 Automotive Axles Limited (NSE:AUTOAXLES) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Automotive Axles

What Is Automotive Axles's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Automotive Axles had ₹145.8m of debt in March 2022, down from ₹187.5m, one year before. However, it does have ₹971.7m in cash offsetting this, leading to net cash of ₹825.8m.

How Strong Is Automotive Axles' Balance Sheet?

We can see from the most recent balance sheet that Automotive Axles had liabilities of ₹3.97b falling due within a year, and liabilities of ₹268.7m due beyond that. On the other hand, it had cash of ₹971.7m and ₹3.96b worth of receivables due within a year. So it can boast ₹687.2m more liquid assets than total liabilities.

This surplus suggests that Automotive Axles has a conservative balance sheet, and could probably eliminate its debt without much difficulty. 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 229% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. 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 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. While Automotive Axles 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. During the last three years, Automotive Axles generated free cash flow amounting to a very robust 92% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Automotive Axles has net cash of ₹825.8m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of ₹214m, being 92% of its EBIT. So is Automotive Axles'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. To that end, you should learn about the 2 warning signs we've spotted with Automotive Axles (including 1 which can't be ignored) .

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.