Is Omax Autos (NSE:OMAXAUTO) A Risky Investment?

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.' 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. We note that Omax Autos Limited (NSE:OMAXAUTO) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Omax Autos

What Is Omax Autos's Net Debt?

The image below, which you can click on for greater detail, shows that Omax Autos had debt of ₹1.64b at the end of March 2021, a reduction from ₹2.21b over a year. On the flip side, it has ₹191.7m in cash leading to net debt of about ₹1.45b.

How Healthy Is Omax Autos' Balance Sheet?

According to the last reported balance sheet, Omax Autos had liabilities of ₹1.16b due within 12 months, and liabilities of ₹1.90b due beyond 12 months. Offsetting these obligations, it had cash of ₹191.7m as well as receivables valued at ₹365.3m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹2.51b.

The deficiency here weighs heavily on the ₹1.38b company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. After all, Omax Autos would likely require a major re-capitalisation if it had to pay its creditors today. There's no doubt that we learn most about debt from the balance sheet. But it is Omax Autos'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.

Over 12 months, Omax Autos made a loss at the EBIT level, and saw its revenue drop to ₹1.6b, which is a fall of 65%. That makes us nervous, to say the least.

Caveat Emptor

Not only did Omax Autos's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping ₹542m. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it had negative free cash flow of ₹298m over the last twelve months. That means it's on the risky side of things. 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. For example, we've discovered 3 warning signs for Omax Autos that you should be aware of before investing here.

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. 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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