Is Akash Infra-Projects (NSE:AKASH) 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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Akash Infra-Projects Limited (NSE:AKASH) 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 is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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 Akash Infra-Projects

What Is Akash Infra-Projects's Net Debt?

As you can see below, at the end of September 2022, Akash Infra-Projects had ₹358.4m of debt, up from ₹248.4m a year ago. Click the image for more detail. However, because it has a cash reserve of ₹55.5m, its net debt is less, at about ₹302.9m.

How Strong Is Akash Infra-Projects' Balance Sheet?

According to the last reported balance sheet, Akash Infra-Projects had liabilities of ₹660.9m due within 12 months, and liabilities of ₹158.1m due beyond 12 months. On the other hand, it had cash of ₹55.5m and ₹1.14b worth of receivables due within a year. So it can boast ₹380.0m 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. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Akash Infra-Projects'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, Akash Infra-Projects reported revenue of ₹893m, which is a gain of 39%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Despite the top line growth, Akash Infra-Projects still had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable ₹94m at the EBIT level. That said, we're impressed with the strong balance sheet liquidity. 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. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 3 warning signs we've spotted with Akash Infra-Projects (including 2 which shouldn't be ignored) .

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.