Is Axiscades Technologies (NSE:AXISCADES) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Axiscades Technologies Limited (NSE:AXISCADES) makes use of debt. But should shareholders be worried about its use of debt?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Axiscades Technologies

How Much Debt Does Axiscades Technologies Carry?

The image below, which you can click on for greater detail, shows that Axiscades Technologies had debt of ₹641.2m at the end of September 2021, a reduction from ₹994.5m over a year. But on the other hand it also has ₹1.13b in cash, leading to a ₹485.3m net cash position.

How Strong Is Axiscades Technologies' Balance Sheet?

The latest balance sheet data shows that Axiscades Technologies had liabilities of ₹4.03b due within a year, and liabilities of ₹368.6m falling due after that. On the other hand, it had cash of ₹1.13b and ₹1.20b worth of receivables due within a year. So it has liabilities totalling ₹2.08b more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Axiscades Technologies has a market capitalization of ₹4.59b, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. While it does have liabilities worth noting, Axiscades Technologies also has more cash than debt, so we're pretty confident it can manage its debt safely.

In fact Axiscades Technologies's saving grace is its low debt levels, because its EBIT has tanked 38% in the last twelve months. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. There's no doubt that we learn most about debt from the balance sheet. 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. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

While Axiscades Technologies does have more liabilities than liquid assets, it also has net cash of ₹485.3m. The cherry on top was that in converted 178% of that EBIT to free cash flow, bringing in ₹377m. So we don't have any problem with Axiscades Technologies's use of debt. 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 3 warning signs with Axiscades Technologies (at least 1 which is concerning) , 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.