Does Century Enka (NSE:CENTENKA) Have A Healthy Balance Sheet?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. We can see that Century Enka Limited (NSE:CENTENKA) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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.

See our latest analysis for Century Enka

What Is Century Enka's Debt?

The image below, which you can click on for greater detail, shows that Century Enka had debt of ₹519.2m at the end of September 2024, a reduction from ₹674.5m over a year. But on the other hand it also has ₹3.21b in cash, leading to a ₹2.69b net cash position.

A Look At Century Enka's Liabilities

Zooming in on the latest balance sheet data, we can see that Century Enka had liabilities of ₹3.20b due within 12 months and liabilities of ₹1.52b due beyond that. Offsetting these obligations, it had cash of ₹3.21b as well as receivables valued at ₹2.25b due within 12 months. So it can boast ₹735.0m more liquid assets than total liabilities.

This surplus suggests that Century Enka has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Century Enka has more cash than debt is arguably a good indication that it can manage its debt safely.

Better yet, Century Enka grew its EBIT by 274% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. When analysing debt levels, the balance sheet is the obvious place to start. But it is Century Enka's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Century Enka 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 last three years, Century Enka reported free cash flow worth 18% of its EBIT, which is really quite low. That limp level of cash conversion undermines its ability to manage and pay down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Century Enka has ₹2.69b in net cash and a decent-looking balance sheet. And we liked the look of last year's 274% year-on-year EBIT growth. So is Century Enka's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Century Enka is showing 2 warning signs in our investment analysis , and 1 of those is concerning...

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.