Is Man Infraconstruction (NSE:MANINFRA) A Risky Investment?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 Man Infraconstruction Limited (NSE:MANINFRA) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Man Infraconstruction

How Much Debt Does Man Infraconstruction Carry?

As you can see below, at the end of September 2021, Man Infraconstruction had ₹4.89b of debt, up from ₹4.44b a year ago. Click the image for more detail. However, it does have ₹5.38b in cash offsetting this, leading to net cash of ₹487.2m.

A Look At Man Infraconstruction's Liabilities

We can see from the most recent balance sheet that Man Infraconstruction had liabilities of ₹4.51b falling due within a year, and liabilities of ₹3.55b due beyond that. Offsetting this, it had ₹5.38b in cash and ₹1.95b in receivables that were due within 12 months. So it has liabilities totalling ₹727.1m more than its cash and near-term receivables, combined.

Given Man Infraconstruction has a market capitalization of ₹32.8b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Man Infraconstruction boasts net cash, so it's fair to say it does not have a heavy debt load!

Pleasingly, Man Infraconstruction is growing its EBIT faster than former Australian PM Bob Hawke downs a yard glass, boasting a 2,048% gain in the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Man Infraconstruction 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Man Infraconstruction 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, Man Infraconstruction 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 it is always sensible to look at a company's total liabilities, it is very reassuring that Man Infraconstruction has ₹487.2m in net cash. And it impressed us with free cash flow of ₹2.7b, being 139% of its EBIT. So is Man Infraconstruction'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. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 3 warning signs with Man Infraconstruction (at least 1 which is a bit concerning) , and understanding them should be part of your investment process.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.