Here's Why Munjal Auto Industries (NSE:MUNJALAU) Can Manage Its Debt Responsibly

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Munjal Auto Industries Limited (NSE:MUNJALAU) makes use of debt. But is this debt a concern to shareholders?

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. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Munjal Auto Industries

What Is Munjal Auto Industries's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Munjal Auto Industries had ₹1.31b of debt, an increase on ₹926.2m, over one year. However, it does have ₹1.48b in cash offsetting this, leading to net cash of ₹176.7m.

How Strong Is Munjal Auto Industries' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Munjal Auto Industries had liabilities of ₹6.34b due within 12 months and liabilities of ₹2.22b due beyond that. Offsetting this, it had ₹1.48b in cash and ₹3.55b in receivables that were due within 12 months. So it has liabilities totalling ₹3.53b more than its cash and near-term receivables, combined.

Munjal Auto Industries has a market capitalization of ₹9.38b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Despite its noteworthy liabilities, Munjal Auto Industries boasts net cash, so it's fair to say it does not have a heavy debt load!

Importantly, Munjal Auto Industries grew its EBIT by 43% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Munjal Auto Industries 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Munjal Auto Industries 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. During the last three years, Munjal Auto Industries generated free cash flow amounting to a very robust 90% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing Up

Although Munjal Auto Industries's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of ₹176.7m. The cherry on top was that in converted 90% of that EBIT to free cash flow, bringing in -₹193m. So we don't think Munjal Auto Industries's use of debt is risky. 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. Case in point: We've spotted 1 warning sign for Munjal Auto Industries you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.