Here's Why Axiscades Technologies (NSE:AXISCADES) Can Manage Its Debt Responsibly

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. Importantly, Axiscades Technologies Limited (NSE:AXISCADES) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest 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 Axiscades Technologies

How Much Debt Does Axiscades Technologies Carry?

You can click the graphic below for the historical numbers, but it shows that Axiscades Technologies had ₹488.1m of debt in March 2022, down from ₹827.7m, one year before. However, its balance sheet shows it holds ₹1.21b in cash, so it actually has ₹718.2m net cash.

How Strong Is Axiscades Technologies' Balance Sheet?

According to the last reported balance sheet, Axiscades Technologies had liabilities of ₹4.36b due within 12 months, and liabilities of ₹221.1m due beyond 12 months. Offsetting these obligations, it had cash of ₹1.21b as well as receivables valued at ₹1.45b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹1.92b.

Axiscades Technologies has a market capitalization of ₹5.59b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Despite its noteworthy liabilities, Axiscades Technologies boasts net cash, so it's fair to say it does not have a heavy debt load!

It is well worth noting that Axiscades Technologies's EBIT shot up like bamboo after rain, gaining 43% in the last twelve months. That'll make it easier to manage its debt. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Axiscades Technologies will need earnings to service that debt. 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 Axiscades Technologies 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. Over the last three years, Axiscades Technologies actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

Although Axiscades Technologies's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of ₹718.2m. And it impressed us with free cash flow of ₹176m, being 114% of its EBIT. So is Axiscades Technologies's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 2 warning signs with Axiscades Technologies , and understanding them should be part of your investment process.

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. 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.