Here's Why Lumax Auto Technologies (NSE:LUMAXTECH) Has A Meaningful Debt Burden

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.' 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 Lumax Auto Technologies Limited (NSE:LUMAXTECH) makes use of debt. But is this debt a concern to shareholders?

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. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Lumax Auto Technologies

What Is Lumax Auto Technologies's Net Debt?

As you can see below, Lumax Auto Technologies had ₹465.0m of debt at September 2020, down from ₹947.7m a year prior. But on the other hand it also has ₹917.7m in cash, leading to a ₹452.7m net cash position.

How Healthy Is Lumax Auto Technologies' Balance Sheet?

The latest balance sheet data shows that Lumax Auto Technologies had liabilities of ₹3.05b due within a year, and liabilities of ₹598.0m falling due after that. Offsetting these obligations, it had cash of ₹917.7m as well as receivables valued at ₹1.97b due within 12 months. So its liabilities total ₹762.8m more than the combination of its cash and short-term receivables.

Given Lumax Auto Technologies has a market capitalization of ₹9.02b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Lumax Auto Technologies also has more cash than debt, so we're pretty confident it can manage its debt safely.

In fact Lumax Auto Technologies's saving grace is its low debt levels, because its EBIT has tanked 68% in the last twelve months. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Lumax Auto Technologies's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Lumax Auto Technologies 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. In the last three years, Lumax Auto Technologies's free cash flow amounted to 27% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing up

We could understand if investors are concerned about Lumax Auto Technologies's liabilities, but we can be reassured by the fact it has has net cash of ₹452.7m. So although we see some areas for improvement, we're not too worried about Lumax Auto Technologies's balance sheet. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Lumax Auto Technologies is showing 3 warning signs in our investment analysis , 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.

If you’re looking to trade Lumax Auto Technologies, open an account with the lowest-cost* platform trusted by professionals, Interactive Brokers. Their clients from over 200 countries and territories trade stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.