Does Man Industries (India) (NSE:MANINDS) Have A Healthy Balance Sheet?

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 can see that Man Industries (India) Limited (NSE:MANINDS) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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.

Check out our latest analysis for Man Industries (India)

What Is Man Industries (India)'s Net Debt?

The image below, which you can click on for greater detail, shows that Man Industries (India) had debt of ₹317.0m at the end of September 2020, a reduction from ₹1.96b over a year. But on the other hand it also has ₹2.40b in cash, leading to a ₹2.08b net cash position.

How Healthy Is Man Industries (India)'s Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Man Industries (India) had liabilities of ₹7.75b due within 12 months and liabilities of ₹385.2m due beyond that. On the other hand, it had cash of ₹2.40b and ₹3.86b worth of receivables due within a year. So its liabilities total ₹1.88b more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Man Industries (India) has a market capitalization of ₹4.23b, 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, Man Industries (India) also has more cash than debt, so we're pretty confident it can manage its debt safely.

It is well worth noting that Man Industries (India)'s EBIT shot up like bamboo after rain, gaining 49% in the last twelve months. That'll make it easier to manage its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Man Industries (India)'s earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Man Industries (India) may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Happily for any shareholders, Man Industries (India) actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

Although Man Industries (India)'s balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of ₹2.08b. And it impressed us with free cash flow of ₹4.1b, being 161% of its EBIT. So is Man Industries (India)'s debt a risk? It doesn't seem so to us. 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. Case in point: We've spotted 2 warning signs for Man Industries (India) you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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