India Motor Parts and Accessories (NSE:IMPAL) Has A Pretty Healthy Balance Sheet

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 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. Importantly, India Motor Parts and Accessories Limited (NSE:IMPAL) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. 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 India Motor Parts and Accessories

What Is India Motor Parts and Accessories's Net Debt?

The chart below, which you can click on for greater detail, shows that India Motor Parts and Accessories had ₹135.8m in debt in March 2020; about the same as the year before. However, its balance sheet shows it holds ₹1.92b in cash, so it actually has ₹1.79b net cash.

How Strong Is India Motor Parts and Accessories's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that India Motor Parts and Accessories had liabilities of ₹571.6m due within 12 months and liabilities of ₹605.1m due beyond that. Offsetting this, it had ₹1.92b in cash and ₹879.2m in receivables that were due within 12 months. So it actually has ₹1.63b more liquid assets than total liabilities.

This excess liquidity suggests that India Motor Parts and Accessories is taking a careful approach to debt. Due to its strong net asset position, it is not likely to face issues with its lenders. Simply put, the fact that India Motor Parts and Accessories has more cash than debt is arguably a good indication that it can manage its debt safely.

But the bad news is that India Motor Parts and Accessories 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 India Motor Parts and Accessories'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 business needs free cash flow to pay off debt; accounting profits just don't cut it. India Motor Parts and Accessories 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. Over the last three years, India Motor Parts and Accessories reported free cash flow worth 20% of its EBIT, which is really quite low. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that India Motor Parts and Accessories has net cash of ₹1.79b, as well as more liquid assets than liabilities. So we don't have any problem with India Motor Parts and Accessories's use of debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 2 warning signs for India Motor Parts and Accessories 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.

If you’re looking to trade India Motor Parts and Accessories, open an account with the lowest-cost* platform trusted by professionals, Interactive Brokers. Their clients from over 200 countries and territories trade stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

This article by Simply Wall St is general in nature. 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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com.