Is Cello World (NSE:CELLO) A Risky Investment?

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

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Cello World

What Is Cello World's Debt?

The image below, which you can click on for greater detail, shows that Cello World had debt of ₹486.3m at the end of September 2024, a reduction from ₹3.20b over a year. However, its balance sheet shows it holds ₹5.57b in cash, so it actually has ₹5.08b net cash.

A Look At Cello World's Liabilities

The latest balance sheet data shows that Cello World had liabilities of ₹2.60b due within a year, and liabilities of ₹251.6m falling due after that. On the other hand, it had cash of ₹5.57b and ₹6.70b worth of receivables due within a year. So it can boast ₹9.41b more liquid assets than total liabilities.

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

Fortunately, Cello World grew its EBIT by 9.0% in the last year, making that debt load look even more manageable. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Cello World'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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Cello World 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. In the last three years, Cello World created free cash flow amounting to 11% of its EBIT, an uninspiring performance. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Cello World has net cash of ₹5.08b, as well as more liquid assets than liabilities. And it also grew its EBIT by 9.0% over the last year. So we don't have any problem with Cello World's use of debt. 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 Cello World has 2 warning signs (and 1 which is a bit unpleasant) we think you should know about.

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.