Legendary fund manager Li Lu (whom Charlie Munger once backed) once said, “The greatest risk in investing is not price volatility, but whether you will suffer a permanent loss of capital. So it seems smart money knows that debt – which is usually involved in bankruptcies – is a very important factor when you’re assessing a company’s risk. Like many other companies Akash Infra-Projects Limited (NSE:AKASH) uses debt. But the real question is whether this debt makes the business risky.
What risk does debt carry?
Debt helps a business until the business struggles to pay it back, either with new capital or with free cash flow. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is when a company has to dilute shareholders at a cheap share price just to keep debt under control. By replacing dilution, however, debt can be a great tool for companies that need capital to invest in growth at high rates of return. When we think about a company’s use of debt, we first look at cash and debt together.
Check out our latest analysis for Akash Infra-Projects
How much debt does Akash Infra-Projects have?
The image below, which you can click for more details, shows that Akash Infra-Projects had a debt of ₹227.1 million at the end of March 2022, a reduction from ₹239.1 million on a year. However, since he has a cash reserve of ₹65.2 million, his net debt is lower at around ₹161.9 million.
What is the track record of Akash Infra-Projects?
According to the latest published balance sheet, Akash Infra-Projects had liabilities of ₹506.9 million due within 12 months and liabilities of ₹168.4 million due beyond 12 months. In return, he had ₹65.2 million in cash and ₹1.07 billion in receivables due within 12 months. So he actually has ₹463.8 million After liquid assets than total liabilities.
This surplus strongly suggests that Akash Infra-Projects has a rock-solid balance sheet (and debt is nothing to worry about). Given this fact, we think its balance sheet is as strong as an ox. There is no doubt that we learn the most about debt from the balance sheet. But you can’t look at debt in total isolation; since Akash Infra-Projects will need revenue to repay this debt. So, when considering debt, it is definitely worth looking at the earnings trend. Click here for an interactive preview.
Last year, Akash Infra-Projects was not profitable on an EBIT level, but managed to increase its turnover by 18%, to £788 million. This rate of growth is a bit slow for our liking, but it takes all types to make a world.
Caveat Emptor
Over the last twelve months, Akash Infra-Projects recorded a loss of earnings before interest and taxes (EBIT). Indeed, it lost a very considerable ₹111 million in EBIT. That said, the balance sheet currently has plenty of cash. This will give the business time and space to grow and expand its business as needed. The business is risky as it will grow in the future to achieve profitability and free cash flow. There is no doubt that we learn the most about debt from the balance sheet. But at the end of the day, every business can contain risks that exist outside of the balance sheet. We have identified 3 warning signs with Akash Infra-Projects (at least 2 that are significant), and understanding them should be part of your investment process.
If, after all that, you’re more interested in a fast-growing company with a strong balance sheet, check out our list of cash-flowing growth stocks without further ado.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.
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