Stock Analysis

Does Manaksia Coated Metals & Industries (NSE:MANAKCOAT) Have A Healthy Balance Sheet?

Source: Shutterstock

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.' 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. Importantly, Manaksia Coated Metals & Industries Limited (NSE:MANAKCOAT) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Manaksia Coated Metals & Industries

How Much Debt Does Manaksia Coated Metals & Industries Carry?

The image below, which you can click on for greater detail, shows that at September 2022 Manaksia Coated Metals & Industries had debt of ₹2.04b, up from ₹1.57b in one year. However, it does have ₹251.2m in cash offsetting this, leading to net debt of about ₹1.79b.

NSEI:MANAKCOAT Debt to Equity History March 18th 2023

How Strong Is Manaksia Coated Metals & Industries' Balance Sheet?

According to the last reported balance sheet, Manaksia Coated Metals & Industries had liabilities of ₹2.98b due within 12 months, and liabilities of ₹981.5m due beyond 12 months. Offsetting these obligations, it had cash of ₹251.2m as well as receivables valued at ₹297.4m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹3.41b.

This deficit casts a shadow over the ₹1.01b company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Manaksia Coated Metals & Industries would likely require a major re-capitalisation if it had to pay its creditors today.

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Manaksia Coated Metals & Industries shareholders face the double whammy of a high net debt to EBITDA ratio (5.0), and fairly weak interest coverage, since EBIT is just 1.4 times the interest expense. This means we'd consider it to have a heavy debt load. Fortunately, Manaksia Coated Metals & Industries grew its EBIT by 10.0% in the last year, slowly shrinking its debt relative to earnings. 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 Manaksia Coated Metals & Industries 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So we clearly need to look at whether that EBIT is leading to corresponding free cash flow. During the last three years, Manaksia Coated Metals & Industries burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Our View

To be frank both Manaksia Coated Metals & Industries's conversion of EBIT to free cash flow and its track record of staying on top of its total liabilities make us rather uncomfortable with its debt levels. But at least it's pretty decent at growing its EBIT; that's encouraging. After considering the datapoints discussed, we think Manaksia Coated Metals & Industries has too much debt. While some investors love that sort of risky play, it's certainly not our cup of tea. 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. Be aware that Manaksia Coated Metals & Industries is showing 2 warning signs in our investment analysis , and 1 of those is a bit unpleasant...

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.

Valuation is complex, but we're helping make it simple.

Find out whether Manaksia Coated Metals & Industries is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

View the Free Analysis