Health Check: How Prudently Does Omax Autos (NSE:OMAXAUTO) Use 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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Omax Autos Limited (NSE:OMAXAUTO) 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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Omax Autos

What Is Omax Autos's Debt?

As you can see below, Omax Autos had ₹1.44b of debt at September 2022, down from ₹2.08b a year prior. However, because it has a cash reserve of ₹360.3m, its net debt is less, at about ₹1.08b.

A Look At Omax Autos' Liabilities

According to the last reported balance sheet, Omax Autos had liabilities of ₹1.07b due within 12 months, and liabilities of ₹1.27b due beyond 12 months. On the other hand, it had cash of ₹360.3m and ₹136.6m worth of receivables due within a year. So it has liabilities totalling ₹1.84b more than its cash and near-term receivables, combined.

Given this deficit is actually higher than the company's market capitalization of ₹1.44b, we think shareholders really should watch Omax Autos's debt levels, like a parent watching their child ride a bike for the first time. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Omax Autos's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Omax Autos wasn't profitable at an EBIT level, but managed to grow its revenue by 56%, to ₹2.7b. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

Even though Omax Autos managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. Its EBIT loss was a whopping ₹290m. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. But on the bright side the company actually produced a statutory profit of ₹43m and free cash flow of ₹99m. So one might argue that there's still a chance it can get things on the right track. 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. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Omax Autos (of which 1 is significant!) you should know about.

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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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.