Here's Why Manaksia Steels (NSE:MANAKSTEEL) Can Manage Its Debt Responsibly

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.' 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 Steels Limited (NSE:MANAKSTEEL) does use debt in its business. But the more important question is: how much risk is that debt creating?

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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Manaksia Steels

What Is Manaksia Steels's Net Debt?

As you can see below, Manaksia Steels had ₹393.5m of debt at September 2022, down from ₹426.9m a year prior. But on the other hand it also has ₹933.6m in cash, leading to a ₹540.1m net cash position.

A Look At Manaksia Steels' Liabilities

According to the last reported balance sheet, Manaksia Steels had liabilities of ₹1.07b due within 12 months, and liabilities of ₹55.9m due beyond 12 months. Offsetting these obligations, it had cash of ₹933.6m as well as receivables valued at ₹488.3m due within 12 months. So it actually has ₹297.4m more liquid assets than total liabilities.

This short term liquidity is a sign that Manaksia Steels could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Manaksia Steels boasts net cash, so it's fair to say it does not have a heavy debt load!

But the bad news is that Manaksia Steels has seen its EBIT plunge 19% in the last twelve months. If that rate of decline in earnings continues, the company could find itself in a tight spot. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Manaksia Steels'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 company can only pay off debt with cold hard cash, not accounting profits. While Manaksia Steels 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. Looking at the most recent three years, Manaksia Steels recorded free cash flow of 28% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Manaksia Steels has net cash of ₹540.1m, as well as more liquid assets than liabilities. So we are not troubled with Manaksia Steels's debt use. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 2 warning signs for Manaksia Steels that you should be aware of before investing here.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.