Here's Why Manaksia Coated Metals & Industries (NSE:MANAKCOAT) Is Weighed Down By Its Debt Load

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Manaksia Coated Metals & Industries Limited (NSE:MANAKCOAT) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider 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 2020 Manaksia Coated Metals & Industries had debt of ₹1.34b, up from ₹1.27b in one year. However, it also had ₹132.0m in cash, and so its net debt is ₹1.20b.

A Look At Manaksia Coated Metals & Industries's Liabilities

According to the last reported balance sheet, Manaksia Coated Metals & Industries had liabilities of ₹1.82b due within 12 months, and liabilities of ₹1.21b due beyond 12 months. Offsetting these obligations, it had cash of ₹132.0m as well as receivables valued at ₹392.6m due within 12 months. So its liabilities total ₹2.50b more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the ₹412.9m 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.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

While we wouldn't worry about Manaksia Coated Metals & Industries's net debt to EBITDA ratio of 4.3, we think its super-low interest cover of 1.4 times is a sign of high leverage. It seems clear that the cost of borrowing money is negatively impacting returns for shareholders, of late. Given the debt load, it's hardly ideal that Manaksia Coated Metals & Industries's EBIT was pretty flat over the last twelve months. There's no doubt that we learn most about debt from the balance sheet. 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, a company can only pay off debt with cold hard cash, not accounting profits. 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 its EBIT growth rate is not so bad. 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. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 4 warning signs for Manaksia Coated Metals & Industries (2 are a bit unpleasant!) that you should be aware of before investing here.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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This article by Simply Wall St is general in nature. 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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