These 4 Measures Indicate That Manaksia Coated Metals & Industries (NSE:MANAKCOAT) Is Using Debt In A Risky Way

Warren Buffett famously said, '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. We can see that Manaksia Coated Metals & Industries Limited (NSE:MANAKCOAT) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Manaksia Coated Metals & Industries

How Much Debt Does Manaksia Coated Metals & Industries Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Manaksia Coated Metals & Industries had ₹1.42b of debt, an increase on ₹1.27b, over one year. However, because it has a cash reserve of ₹132.0m, its net debt is less, at about ₹1.29b.

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

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. On the other hand, it had cash of ₹132.0m and ₹392.6m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹2.50b.

This deficit casts a shadow over the ₹973.2m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Manaksia Coated Metals & Industries would probably need a major re-capitalization if its creditors were to demand repayment.

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). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

While we wouldn't worry about Manaksia Coated Metals & Industries's net debt to EBITDA ratio of 4.4, we think its super-low interest cover of 1.5 times is a sign of high leverage. So shareholders should probably be aware that interest expenses appear to have really impacted the business lately. Fortunately, Manaksia Coated Metals & Industries grew its EBIT by 7.7% in the last year, slowly shrinking its debt relative to earnings. There's no doubt that we learn most about debt from the balance sheet. But it is Manaksia Coated Metals & Industries'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, 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. Considering the last three years, Manaksia Coated Metals & Industries actually recorded a cash outflow, overall. Debt is far more risky for companies with unreliable free cash flow, so shareholders should be hoping that the past expenditure will produce free cash flow in the future.

Our View

To be frank both Manaksia Coated Metals & Industries's interest cover and its track record of staying on top of its total liabilities make us rather uncomfortable with its debt levels. But on the bright side, its EBIT growth rate is a good sign, and makes us more optimistic. 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. 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. To that end, you should learn about the 3 warning signs we've spotted with Manaksia Coated Metals & Industries (including 1 which can't be ignored) .

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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