Is Axiscades Technologies (NSE:AXISCADES) using too much debt?
Warren Buffett said: “Volatility is far from synonymous with risk. So it may be obvious that you need to take debt into account when thinking about the risk of a given stock, because too much debt can sink a business. Like many other companies Axiscades Technologies Limited (NSE:AXISCADES) uses debt. But should shareholders worry about its use of debt?
When is debt dangerous?
Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, it exists at their mercy. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are mercilessly liquidated by their bankers. However, a more frequent (but still costly) event is when a company has to issue shares at bargain prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, especially capital-intensive businesses. The first thing to do when considering how much debt a business has is to look at its cash and debt together.
See our latest analysis for Axiscades Technologies
What is Axiscades Technologies’ debt?
The image below, which you can click on for more details, shows that Axiscades Technologies had debt of ₹641.2m at the end of September 2021, a reduction from ₹994.5m year on year . But on the other hand, it also has ₹1.13 billion in cash, resulting in a net cash position of ₹485.3 million.
How solid is Axiscades Technologies’ balance sheet?
The latest balance sheet data shows that Axiscades Technologies had liabilities of ₹4.03 billion due within one year, and liabilities of ₹368.6 million falling due thereafter. On the other hand, it had ₹1.13 billion in cash and ₹1.20 billion in receivables due within a year. It therefore has liabilities totaling ₹2.08 billion more than its cash and short-term receivables, combined.
While that might sound like a lot, it’s not that bad since Axiscades Technologies has a market capitalization of ₹4.59 billion, and so it could probably bolster its balance sheet by raising capital if needed. However, it is always worth taking a close look at its ability to repay debt. Although it has liabilities to note, Axiscades Technologies also has more cash than debt, so we are quite confident that it can manage its debt safely.
In fact, Axiscades Technologies’ saving grace is its low level of debt, as its EBIT has fallen by 38% in the last twelve months. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. 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 Axiscades Technologies will need income to repay this debt. So, if you want to know more about its earnings, it may be worth checking out this graph of its long-term trend.
Finally, a business needs free cash flow to pay off its debts; book profits are not enough. Although Axiscades Technologies has net cash on its balance sheet, it is always interesting to look at its ability to convert earnings before interest and taxes (EBIT) to free cash flow, to help us understand how fast it is building ( or erodes) this treasury. balance. Over the past three years, Axiscades Technologies has actually produced more free cash flow than EBIT. There’s nothing better than incoming money to stay in the good books of your lenders.
Although Axiscades Technologies has more liabilities than liquid assets, it also has a net cash of ₹485.3 million. The icing on the cake was that he converted 178% of that EBIT into free cash flow, bringing in ₹377 million. We therefore have no problem with the use of debt by Axiscades Technologies. When analyzing debt levels, the balance sheet is the obvious starting point. 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 Axiscades Technologies (at least 1 which is concerning), 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-neutral growth stocks right away.
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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.