Cera Sanitaryware (NSE:CERA) Has A Rock Solid Balance Sheet

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Cera Sanitaryware Limited (NSE:CERA) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Cera Sanitaryware

How Much Debt Does Cera Sanitaryware Carry?

You can click the graphic below for the historical numbers, but it shows that Cera Sanitaryware had ₹441.2m of debt in September 2022, down from ₹1.10b, one year before. But on the other hand it also has ₹5.44b in cash, leading to a ₹5.00b net cash position.

A Look At Cera Sanitaryware's Liabilities

Zooming in on the latest balance sheet data, we can see that Cera Sanitaryware had liabilities of ₹3.38b due within 12 months and liabilities of ₹922.5m due beyond that. Offsetting this, it had ₹5.44b in cash and ₹1.41b in receivables that were due within 12 months. So it can boast ₹2.55b more liquid assets than total liabilities.

This surplus suggests that Cera Sanitaryware has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Cera Sanitaryware has more cash than debt is arguably a good indication that it can manage its debt safely.

In addition to that, we're happy to report that Cera Sanitaryware has boosted its EBIT by 42%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Cera Sanitaryware can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Cera Sanitaryware 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 most recent three years, Cera Sanitaryware recorded free cash flow worth 79% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Cera Sanitaryware has net cash of ₹5.00b, as well as more liquid assets than liabilities. And we liked the look of last year's 42% year-on-year EBIT growth. So we don't think Cera Sanitaryware's use of debt is risky. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Cera Sanitaryware's earnings per share history for free.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.