Manaksia (NSE:MANAKSIA) Has A Rock Solid Balance Sheet

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.' 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 can see that Manaksia Limited (NSE:MANAKSIA) 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Manaksia

What Is Manaksia's Debt?

You can click the graphic below for the historical numbers, but it shows that Manaksia had ₹306.4m of debt in September 2020, down from ₹342.9m, one year before. But on the other hand it also has ₹6.06b in cash, leading to a ₹5.76b net cash position.

A Look At Manaksia's Liabilities

We can see from the most recent balance sheet that Manaksia had liabilities of ₹992.3m falling due within a year, and liabilities of ₹437.3m due beyond that. On the other hand, it had cash of ₹6.06b and ₹1.21b worth of receivables due within a year. So it can boast ₹5.85b more liquid assets than total liabilities.

This surplus strongly suggests that Manaksia has a rock-solid balance sheet (and the debt is of no concern whatsoever). 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!

In addition to that, we're happy to report that Manaksia has boosted its EBIT by 40%, thus reducing the spectre of future debt repayments. 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 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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. Happily for any shareholders, Manaksia actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

While it is always sensible to investigate a company's debt, in this case Manaksia has ₹5.76b in net cash and a strong balance sheet. And it impressed us with free cash flow of ₹1.4b, being 244% of its EBIT. The bottom line is that Manaksia's use of debt is absolutely fine. 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. Take risks, for example - Manaksia has 4 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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