We Think Cadsys (India) (NSE:CADSYS) Has A Fair Chunk Of 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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Cadsys (India) Limited (NSE:CADSYS) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Cadsys (India)

How Much Debt Does Cadsys (India) Carry?

As you can see below, at the end of March 2021, Cadsys (India) had ₹177.4m of debt, up from ₹125.1m a year ago. Click the image for more detail. However, it does have ₹86.2m in cash offsetting this, leading to net debt of 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. Offsetting these obligations, it had cash of ₹86.2m as well as receivables valued at ₹155.2m due within 12 months. So it actually has ₹25.4m 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. There's no doubt that we learn most about debt from the balance sheet. But it is Cadsys (India)'s earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Cadsys (India) had a loss before interest and tax, and actually shrunk its revenue by 24%, to ₹315m. That makes us nervous, to say the least.

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). Indeed, it lost a very considerable ₹64m at the EBIT level. 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. But we'd want to see some positive free cashflow before spending much time on trying to understand the stock. This one is a bit too risky for our liking. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 4 warning signs for Cadsys (India) you should be aware of, and 2 of them make us uncomfortable.

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.

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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.
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