These 4 Measures Indicate That Lux Industries (NSE:LUXIND) Is Using Debt Safely

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 Lux Industries Limited (NSE:LUXIND) makes use of debt. But the real question is whether this debt is making the company risky.

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 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 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 Lux Industries

What Is Lux Industries's Debt?

As you can see below, Lux Industries had ₹1.18b of debt at March 2021, down from ₹1.42b a year prior. However, it does have ₹2.69b in cash offsetting this, leading to net cash of ₹1.51b.

How Strong Is Lux Industries' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Lux Industries had liabilities of ₹4.54b due within 12 months and liabilities of ₹370.9m due beyond that. Offsetting these obligations, it had cash of ₹2.69b as well as receivables valued at ₹4.58b due within 12 months. So it can boast ₹2.36b more liquid assets than total liabilities.

Having regard to Lux Industries' size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the ₹125.7b company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that Lux Industries has more cash than debt is arguably a good indication that it can manage its debt safely.

Even more impressive was the fact that Lux Industries grew its EBIT by 116% over twelve months. That boost will make it even easier to pay down debt going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Lux Industries's earnings that will influence how the balance sheet holds up in the future. 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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. During the last three years, Lux Industries generated free cash flow amounting to a very robust 89% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing up

While it is always sensible to investigate a company's debt, in this case Lux Industries has ₹1.51b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of ₹3.2b, being 89% of its EBIT. So we don't think Lux Industries'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. For instance, we've identified 2 warning signs for Lux Industries that 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.
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