Max Ventures and Industries (NSE:MAXVIL) Seems To Use Debt Quite Sensibly

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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 Max Ventures and Industries Limited (NSE:MAXVIL) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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 Max Ventures and Industries

What Is Max Ventures and Industries's Debt?

You can click the graphic below for the historical numbers, but it shows that Max Ventures and Industries had ₹3.17b of debt in March 2022, down from ₹5.02b, one year before. However, it does have ₹4.74b in cash offsetting this, leading to net cash of ₹1.58b.

How Strong Is Max Ventures and Industries' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Max Ventures and Industries had liabilities of ₹538.3m due within 12 months and liabilities of ₹3.70b due beyond that. Offsetting these obligations, it had cash of ₹4.74b as well as receivables valued at ₹123.0m due within 12 months. So it can boast ₹628.7m more liquid assets than total liabilities.

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

Shareholders should be aware that Max Ventures and Industries's EBIT was down 87% last year. If that decline continues then paying off debt will be harder than selling foie gras at a vegan convention. When analysing debt levels, the balance sheet is the obvious place to start. But it is Max Ventures and 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Max Ventures and Industries 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. During the last three years, Max Ventures and Industries generated free cash flow amounting to a very robust 99% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Max Ventures and Industries has net cash of ₹1.58b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of ₹2.9b, being 99% of its EBIT. So we are not troubled with Max Ventures and Industries's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 1 warning sign we've spotted with Max Ventures and Industries .

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.