Manaksia Steels (NSE:MANAKSTEEL) Could Easily Take On More Debt

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Manaksia Steels Limited (NSE:MANAKSTEEL) makes use of debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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 Steels

What Is Manaksia Steels's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Manaksia Steels had ₹287.6m of debt, an increase on ₹162.8m, over one year. But it also has ₹349.3m in cash to offset that, meaning it has ₹61.7m net cash.

A Look At Manaksia Steels's Liabilities

The latest balance sheet data shows that Manaksia Steels had liabilities of ₹1.12b due within a year, and liabilities of ₹41.2m falling due after that. Offsetting this, it had ₹349.3m in cash and ₹306.5m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹505.7m.

This deficit isn't so bad because Manaksia Steels is worth ₹1.21b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. While it does have liabilities worth noting, Manaksia Steels also has more cash than debt, so we're pretty confident it can manage its debt safely.

On top of that, Manaksia Steels grew its EBIT by 80% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But it is Manaksia Steels'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, 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. Happily for any shareholders, Manaksia Steels 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

Although Manaksia Steels's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of ₹61.7m. And it impressed us with free cash flow of ₹163m, being 166% of its EBIT. So is Manaksia Steels's debt a risk? It doesn't seem so to us. 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. Consider risks, for instance. Every company has them, and we've spotted 2 warning signs for Manaksia Steels you should know about.

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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