Cera Sanitaryware (NSE:CERA) Seems To Use Debt Quite Sensibly

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Cera Sanitaryware

What Is Cera Sanitaryware's Debt?

As you can see below, Cera Sanitaryware had ₹144.8m of debt at September 2024, down from ₹237.0m a year prior. However, its balance sheet shows it holds ₹6.45b in cash, so it actually has ₹6.30b net cash.

How Strong Is Cera Sanitaryware's Balance Sheet?

The latest balance sheet data shows that Cera Sanitaryware had liabilities of ₹3.62b due within a year, and liabilities of ₹1.26b falling due after that. On the other hand, it had cash of ₹6.45b and ₹2.05b worth of receivables due within a year. So it actually has ₹3.62b 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. Succinctly put, Cera Sanitaryware boasts net cash, so it's fair to say it does not have a heavy debt load!

But the bad news is that Cera Sanitaryware has seen its EBIT plunge 10% in the last twelve months. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Cera Sanitaryware's ability to maintain a healthy balance sheet going forward. 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. While Cera Sanitaryware has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, Cera Sanitaryware produced sturdy free cash flow equating to 54% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While it is always sensible to investigate a company's debt, in this case Cera Sanitaryware has ₹6.30b in net cash and a decent-looking balance sheet. So we are not troubled with Cera Sanitaryware's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 1 warning sign for Cera Sanitaryware that you should be aware of before investing here.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.