Does PIX Transmissions (NSE:PIXTRANS) Have A Healthy Balance Sheet?

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. We note that PIX Transmissions Limited (NSE:PIXTRANS) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for PIX Transmissions

What Is PIX Transmissions's Debt?

You can click the graphic below for the historical numbers, but it shows that PIX Transmissions had ₹389.0m of debt in September 2024, down from ₹517.6m, one year before. But it also has ₹1.77b in cash to offset that, meaning it has ₹1.38b net cash.

A Look At PIX Transmissions' Liabilities

According to the last reported balance sheet, PIX Transmissions had liabilities of ₹854.9m due within 12 months, and liabilities of ₹716.3m due beyond 12 months. Offsetting these obligations, it had cash of ₹1.77b as well as receivables valued at ₹1.22b due within 12 months. So it can boast ₹1.42b more liquid assets than total liabilities.

This surplus suggests that PIX Transmissions has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, PIX Transmissions boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, PIX Transmissions grew its EBIT by 41% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since PIX Transmissions 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 PIX Transmissions 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. During the last three years, PIX Transmissions produced sturdy free cash flow equating to 79% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that PIX Transmissions has net cash of ₹1.38b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 41% over the last year. So we don't think PIX Transmissions's use of debt is risky. 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. For example PIX Transmissions has 2 warning signs (and 1 which doesn't sit too well with us) we think you should know about.

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.