Is Munjal Auto Industries (NSE:MUNJALAU) Using Too Much Debt?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. Importantly, Munjal Auto Industries Limited (NSE:MUNJALAU) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Munjal Auto Industries

What Is Munjal Auto Industries's Net Debt?

As you can see below, Munjal Auto Industries had ₹1.00b of debt, at March 2024, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has ₹1.83b in cash, leading to a ₹831.3m net cash position.

A Look At Munjal Auto Industries' Liabilities

The latest balance sheet data shows that Munjal Auto Industries had liabilities of ₹5.78b due within a year, and liabilities of ₹2.29b falling due after that. Offsetting this, it had ₹1.83b in cash and ₹2.77b in receivables that were due within 12 months. So it has liabilities totalling ₹3.47b more than its cash and near-term receivables, combined.

Munjal Auto Industries has a market capitalization of ₹9.40b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. 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 72% 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 it is Munjal Auto Industries'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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Munjal Auto Industries 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. Happily for any shareholders, Munjal Auto Industries actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While Munjal Auto Industries does have more liabilities than liquid assets, it also has net cash of ₹831.3m. And it impressed us with free cash flow of ₹861m, being 140% of its EBIT. So is Munjal Auto Industries'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. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Munjal Auto Industries is showing 1 warning sign 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.

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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.

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