Lux Industries (NSE:LUXIND) Has A Rock Solid Balance Sheet

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. Importantly, Lux Industries Limited (NSE:LUXIND) does carry debt. 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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 step when considering a company's debt levels is to consider its cash and debt together.

What Is Lux Industries's Net Debt?

As you can see below, Lux Industries had ₹2.44b of debt at September 2024, down from ₹2.56b a year prior. But on the other hand it also has ₹3.28b in cash, leading to a ₹840.6m net cash position.

How Healthy Is Lux Industries' Balance Sheet?

We can see from the most recent balance sheet that Lux Industries had liabilities of ₹6.75b falling due within a year, and liabilities of ₹422.4m due beyond that. On the other hand, it had cash of ₹3.28b and ₹7.04b worth of receivables due within a year. So it can boast ₹3.15b more liquid assets than total liabilities.

This short term liquidity is a sign that Lux Industries could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Lux Industries has more cash than debt is arguably a good indication that it can manage its debt safely.

View our latest analysis for Lux Industries

In addition to that, we're happy to report that Lux Industries has boosted its EBIT by 55%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Lux Industries can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Lux Industries 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 most recent three years, Lux Industries recorded free cash flow worth 60% 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 it is always sensible to investigate a company's debt, in this case Lux Industries has ₹840.6m in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 55% over the last year. So is Lux Industries's debt a risk? It doesn't seem so to us. Over time, share prices tend to follow earnings per share, so if you're interested in Lux Industries, you may well want to click here to check an interactive graph of its earnings per share history.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.