We Think AMJ Land Holdings (NSE:AMJLAND) Can Stay On Top Of Its Debt

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. We note that AMJ Land Holdings Limited (NSE:AMJLAND) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for AMJ Land Holdings

How Much Debt Does AMJ Land Holdings Carry?

The image below, which you can click on for greater detail, shows that at September 2023 AMJ Land Holdings had debt of ₹150.0m, up from ₹50.0m in one year. However, it does have ₹440.5m in cash offsetting this, leading to net cash of ₹290.5m.

How Healthy Is AMJ Land Holdings' Balance Sheet?

The latest balance sheet data shows that AMJ Land Holdings had liabilities of ₹239.0m due within a year, and liabilities of ₹207.6m falling due after that. On the other hand, it had cash of ₹440.5m and ₹46.0m worth of receivables due within a year. So it actually has ₹39.9m more liquid assets than total liabilities.

This surplus suggests that AMJ Land Holdings has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that AMJ Land Holdings has more cash than debt is arguably a good indication that it can manage its debt safely.

On the other hand, AMJ Land Holdings's EBIT dived 10%, over the last year. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since AMJ Land Holdings 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. AMJ Land Holdings may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Looking at the most recent three years, AMJ Land Holdings recorded free cash flow of 23% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While it is always sensible to investigate a company's debt, in this case AMJ Land Holdings has ₹290.5m in net cash and a decent-looking balance sheet. So we are not troubled with AMJ Land Holdings's debt use. 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. For instance, we've identified 3 warning signs for AMJ Land Holdings that you should be aware of.

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.