These 4 Measures Indicate That PIX Transmissions (NSE:PIXTRANS) Is Using Debt Safely

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 PIX Transmissions Limited (NSE:PIXTRANS) does use debt in its business. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. 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. When we think about a company's use of debt, we first look at cash and debt together.

See 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 ₹440.3m of debt in March 2024, down from ₹684.4m, one year before. However, its balance sheet shows it holds ₹1.25b in cash, so it actually has ₹813.5m net cash.

How Strong Is PIX Transmissions' Balance Sheet?

The latest balance sheet data shows that PIX Transmissions had liabilities of ₹708.6m due within a year, and liabilities of ₹733.0m falling due after that. Offsetting this, it had ₹1.25b in cash and ₹1.11b in receivables that were due within 12 months. So it can boast ₹924.4m 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. Simply put, the fact that PIX Transmissions has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, PIX Transmissions grew its EBIT by 31% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since PIX Transmissions 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. PIX Transmissions 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. Over the most recent three years, PIX Transmissions recorded free cash flow worth 78% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that PIX Transmissions has net cash of ₹813.5m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 31% over the last year. So we don't think PIX Transmissions's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - PIX Transmissions has 1 warning sign we think you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.