Is Maithan Alloys (NSE:MAITHANALL) A Risky Investment?

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, Maithan Alloys Limited (NSE:MAITHANALL) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. 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, 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.

See our latest analysis for Maithan Alloys

How Much Debt Does Maithan Alloys Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2023 Maithan Alloys had ₹137.0m of debt, an increase on ₹55.1m, over one year. But on the other hand it also has ₹21.4b in cash, leading to a ₹21.2b net cash position.

How Healthy Is Maithan Alloys' Balance Sheet?

The latest balance sheet data shows that Maithan Alloys had liabilities of ₹3.14b due within a year, and liabilities of ₹526.3m falling due after that. On the other hand, it had cash of ₹21.4b and ₹2.89b worth of receivables due within a year. So it can boast ₹20.6b more liquid assets than total liabilities.

This excess liquidity is a great indication that Maithan Alloys' balance sheet is almost as strong as Fort Knox. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Simply put, the fact that Maithan Alloys has more cash than debt is arguably a good indication that it can manage its debt safely.

The modesty of its debt load may become crucial for Maithan Alloys if management cannot prevent a repeat of the 78% cut to EBIT over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Maithan Alloys's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Maithan Alloys 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, Maithan Alloys produced sturdy free cash flow equating to 76% 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 it is always sensible to investigate a company's debt, in this case Maithan Alloys has ₹21.2b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of ₹5.9b, being 76% of its EBIT. So is Maithan Alloys's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 1 warning sign we've spotted with Maithan Alloys .

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.