Is Manaksia (NSE:MANAKSIA) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Manaksia Limited (NSE:MANAKSIA) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Manaksia

What Is Manaksia's Net Debt?

The image below, which you can click on for greater detail, shows that at March 2021 Manaksia had debt of ₹518.2m, up from ₹132.4m in one year. But it also has ₹7.07b in cash to offset that, meaning it has ₹6.55b net cash.

A Look At Manaksia's Liabilities

According to the last reported balance sheet, Manaksia had liabilities of ₹1.48b due within 12 months, and liabilities of ₹425.2m due beyond 12 months. Offsetting this, it had ₹7.07b in cash and ₹745.4m in receivables that were due within 12 months. So it actually has ₹5.91b more liquid assets than total liabilities.

This surplus liquidity suggests that Manaksia's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, Manaksia boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, Manaksia grew its EBIT by 113% last year, which is an impressive improvement. 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 Manaksia'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 business needs free cash flow to pay off debt; accounting profits just don't cut it. While Manaksia 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. Over the last three years, Manaksia actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

While it is always sensible to investigate a company's debt, in this case Manaksia has ₹6.55b in net cash and a strong balance sheet. The cherry on top was that in converted 142% of that EBIT to free cash flow, bringing in ₹2.7b. At the end of the day we're not concerned about Manaksia's debt. 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. We've identified 3 warning signs with Manaksia (at least 1 which is a bit concerning) , and understanding them should be part of your investment process.

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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