Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Cerebra Integrated Technologies Limited (NSE:CEREBRAINT) does carry debt. But the real question is whether this debt is making the company risky.
When Is Debt Dangerous?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.
What Is Cerebra Integrated Technologies's Debt?
You can click the graphic below for the historical numbers, but it shows that as of March 2019 Cerebra Integrated Technologies had ₹36.6m of debt, an increase on ₹28.6m, over one year. But on the other hand it also has ₹765.6m in cash, leading to a ₹729.1m net cash position.
How Healthy Is Cerebra Integrated Technologies's Balance Sheet?
We can see from the most recent balance sheet that Cerebra Integrated Technologies had liabilities of ₹1.90b falling due within a year, and liabilities of ₹10.2m due beyond that. Offsetting this, it had ₹765.6m in cash and ₹3.45b in receivables that were due within 12 months. So it actually has ₹2.30b more liquid assets than total liabilities.
This luscious liquidity implies that Cerebra Integrated Technologies's balance sheet is sturdy like a giant sequoia tree. On this view, it seems its balance sheet is as strong as a black-belt karate master. Simply put, the fact that Cerebra Integrated Technologies has more cash than debt is arguably a good indication that it can manage its debt safely.
The modesty of its debt load may become crucial for Cerebra Integrated Technologies if management cannot prevent a repeat of the 22% cut to EBIT over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. There's no doubt that we learn most about debt from the balance sheet. But it is Cerebra Integrated Technologies's earnings that will influence how the balance sheet holds up in the future. 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. Cerebra Integrated Technologies 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. During the last three years, Cerebra Integrated Technologies burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.
While it is always sensible to investigate a company's debt, in this case Cerebra Integrated Technologies has ₹729.1m in net cash and a decent-looking balance sheet. So we are not troubled with Cerebra Integrated Technologies's debt use. Of course, we wouldn't say no to the extra confidence that we'd gain if we knew that Cerebra Integrated Technologies insiders have been buying shares: if you're on the same wavelength, you can find out if insiders are buying by clicking this link.
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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