Health Check: How Prudently Does Century Enka (NSE:CENTENKA) Use Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, Century Enka Limited (NSE:CENTENKA) does carry debt. 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Century Enka

What Is Century Enka's Net Debt?

The image below, which you can click on for greater detail, shows that Century Enka had debt of ₹172.4m at the end of March 2020, a reduction from ₹383.5m over a year. But on the other hand it also has ₹2.65b in cash, leading to a ₹2.48b net cash position.

How Strong Is Century Enka's Balance Sheet?

According to the last reported balance sheet, Century Enka had liabilities of ₹1.27b due within 12 months, and liabilities of ₹1.13b due beyond 12 months. On the other hand, it had cash of ₹2.65b and ₹1.94b worth of receivables due within a year. So it can boast ₹2.20b more liquid assets than total liabilities.

This excess liquidity is a great indication that Century Enka's balance sheet is just as strong as racists are weak. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, Century Enka boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is Century Enka'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.

Over 12 months, Century Enka made a loss at the EBIT level, and saw its revenue drop to ₹12b, which is a fall of 35%. To be frank that doesn't bode well.

So How Risky Is Century Enka?

Although Century Enka had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of ₹522m. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. The next few years will be important as the business matures. 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. Be aware that Century Enka is showing 3 warning signs in our investment analysis , you should know about...

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. 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.
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