Is Cera Sanitaryware (NSE:CERA) Using Too Much Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. As with many other companies Cera Sanitaryware Limited (NSE:CERA) makes use of debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. 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

How Much Debt Does Cera Sanitaryware Carry?

The image below, which you can click on for greater detail, shows that Cera Sanitaryware had debt of ₹444.7m at the end of March 2024, a reduction from ₹530.9m over a year. However, it does have ₹8.10b in cash offsetting this, leading to net cash of ₹7.65b.

A Look At Cera Sanitaryware's Liabilities

According to the last reported balance sheet, Cera Sanitaryware had liabilities of ₹3.80b due within 12 months, and liabilities of ₹1.07b due beyond 12 months. Offsetting this, it had ₹8.10b in cash and ₹2.11b in receivables that were due within 12 months. So it actually has ₹5.33b more liquid assets than total liabilities.

This short term liquidity is a sign that Cera Sanitaryware could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Cera Sanitaryware boasts net cash, so it's fair to say it does not have a heavy debt load!

On the other hand, Cera Sanitaryware saw its EBIT drop by 5.2% in the last twelve months. That sort of decline, if sustained, will obviously make debt harder to handle. When analysing debt levels, the balance sheet is the obvious place to start. 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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. Over the most recent three years, Cera Sanitaryware recorded free cash flow worth 55% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Cera Sanitaryware has net cash of ₹7.65b, as well as more liquid assets than liabilities. So we don't have any problem with Cera Sanitaryware's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 1 warning sign with Cera Sanitaryware , and understanding them should be part of your investment process.

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.