Here's Why Cadsys (India) (NSE:CADSYS) Can Afford Some Debt

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. We note that Cadsys (India) Limited (NSE:CADSYS) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Cadsys (India)

What Is Cadsys (India)'s Debt?

The image below, which you can click on for greater detail, shows that at March 2021 Cadsys (India) had debt of ₹177.4m, up from ₹125.1m in one year. However, because it has a cash reserve of ₹86.2m, its net debt is less, at about ₹91.2m.

How Strong Is Cadsys (India)'s Balance Sheet?

We can see from the most recent balance sheet that Cadsys (India) had liabilities of ₹36.2m falling due within a year, and liabilities of ₹179.8m due beyond that. On the other hand, it had cash of ₹86.2m and ₹153.2m worth of receivables due within a year. So it can boast ₹23.4m more liquid assets than total liabilities.

This surplus suggests that Cadsys (India) has a conservative balance sheet, and could probably eliminate its debt without much difficulty. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Cadsys (India) will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Cadsys (India) made a loss at the EBIT level, and saw its revenue drop to ₹318m, which is a fall of 24%. To be frank that doesn't bode well.

Caveat Emptor

Not only did Cadsys (India)'s revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping ₹63m. On a more positive note, the company does have liquid assets, so it has a bit of time to improve its operations before the debt becomes an acute problem. Still, we'd be more encouraged to study the business in depth if it already had some free cash flow. This one is a bit too risky for our liking. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. We've identified 4 warning signs with Cadsys (India) (at least 2 which are a bit concerning) , and understanding them should be part of your investment process.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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