Does Cera Sanitaryware (NSE:CERA) Have A Healthy Balance Sheet?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Cera Sanitaryware Limited (NSE:CERA) makes use of debt. But should shareholders be worried about its use of debt?

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 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. 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.

Check out our latest analysis for Cera Sanitaryware

What Is Cera Sanitaryware's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Cera Sanitaryware had ₹728.9m of debt in September 2020, down from ₹1.04b, one year before. But it also has ₹3.52b in cash to offset that, meaning it has ₹2.79b net cash.

A Look At Cera Sanitaryware's Liabilities

Zooming in on the latest balance sheet data, we can see that Cera Sanitaryware had liabilities of ₹3.20b due within 12 months and liabilities of ₹1.24b due beyond that. Offsetting these obligations, it had cash of ₹3.52b as well as receivables valued at ₹1.95b due within 12 months. So it actually has ₹1.03b 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!

The modesty of its debt load may become crucial for Cera Sanitaryware if management cannot prevent a repeat of the 40% cut to EBIT over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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 77% 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 ₹2.79b, as well as more liquid assets than liabilities. The cherry on top was that in converted 77% of that EBIT to free cash flow, bringing in ₹1.9b. So we don't have any problem with Cera Sanitaryware's use of debt. Over time, share prices tend to follow earnings per share, so if you're interested in Cera Sanitaryware, you may well want to click here to check an interactive graph of its earnings per share history.

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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