Man Infraconstruction (NSE:MANINFRA) Seems To Use Debt Quite Sensibly

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.' 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. As with many other companies Man Infraconstruction Limited (NSE:MANINFRA) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Man Infraconstruction

How Much Debt Does Man Infraconstruction Carry?

The image below, which you can click on for greater detail, shows that Man Infraconstruction had debt of ₹184.0m at the end of September 2024, a reduction from ₹2.17b over a year. However, it does have ₹5.41b in cash offsetting this, leading to net cash of ₹5.22b.

A Look At Man Infraconstruction's Liabilities

According to the last reported balance sheet, Man Infraconstruction had liabilities of ₹4.40b due within 12 months, and liabilities of ₹295.2m due beyond 12 months. Offsetting this, it had ₹5.41b in cash and ₹7.54b in receivables that were due within 12 months. So it actually has ₹8.26b more liquid assets than total liabilities.

It's good to see that Man Infraconstruction has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, Man Infraconstruction boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that Man Infraconstruction's load is not too heavy, because its EBIT was down 34% over the last year. 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 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Man Infraconstruction has net cash of ₹5.22b, as well as more liquid assets than liabilities. The cherry on top was that in converted 134% of that EBIT to free cash flow, bringing in ₹4.6b. So we don't think Man Infraconstruction's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 1 warning sign for Man Infraconstruction 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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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.