Akash Infra-Projects (NSE:AKASH) Is Carrying A Fair Bit Of 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 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 Akash Infra-Projects Limited (NSE:AKASH) makes use of debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Akash Infra-Projects

How Much Debt Does Akash Infra-Projects Carry?

The image below, which you can click on for greater detail, shows that Akash Infra-Projects had debt of ₹227.1m at the end of March 2022, a reduction from ₹239.1m over a year. However, because it has a cash reserve of ₹65.2m, its net debt is less, at about ₹161.9m.

How Healthy Is Akash Infra-Projects' Balance Sheet?

According to the last reported balance sheet, Akash Infra-Projects had liabilities of ₹506.9m due within 12 months, and liabilities of ₹168.4m due beyond 12 months. Offsetting this, it had ₹65.2m in cash and ₹1.07b in receivables that were due within 12 months. So it actually has ₹463.8m more liquid assets than total liabilities.

This surplus strongly suggests that Akash Infra-Projects has a rock-solid balance sheet (and the debt is of no concern whatsoever). Having regard to this fact, we think its balance sheet is as strong as an ox. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Akash Infra-Projects 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.

In the last year Akash Infra-Projects wasn't profitable at an EBIT level, but managed to grow its revenue by 18%, to ₹788m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Over the last twelve months Akash Infra-Projects produced an earnings before interest and tax (EBIT) loss. Indeed, it lost a very considerable ₹111m at the EBIT level. Having said that, the balance sheet has plenty of liquid assets for now. That will give the company some time and space to grow and develop its business as need be. The company is risky because it will grow into the future to get to profitability and free cash flow. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 3 warning signs with Akash Infra-Projects (at least 2 which are significant) , and understanding them should be part of your investment process.

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.