We Think Century Enka (NSE:CENTENKA) Can Manage Its Debt With Ease

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. As with many other companies Century Enka Limited (NSE:CENTENKA) makes use of debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Century Enka

How Much Debt Does Century Enka Carry?

You can click the graphic below for the historical numbers, but it shows that Century Enka had ₹119.6m of debt in September 2020, down from ₹309.7m, one year before. But it also has ₹3.03b in cash to offset that, meaning it has ₹2.91b net cash.

How Healthy Is Century Enka's Balance Sheet?

According to the last reported balance sheet, Century Enka had liabilities of ₹740.7m due within 12 months, and liabilities of ₹1.10b due beyond 12 months. Offsetting these obligations, it had cash of ₹3.03b as well as receivables valued at ₹1.49b due within 12 months. So it actually has ₹2.67b more liquid assets than total liabilities.

This surplus liquidity suggests that Century Enka's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. Having regard to this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that Century Enka has more cash than debt is arguably a good indication that it can manage its debt safely.

It is just as well that Century Enka's load is not too heavy, because its EBIT was down 35% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. There's no doubt that we learn most about debt from the balance sheet. But it is Century Enka'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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Century Enka may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, Century Enka actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

While it is always sensible to investigate a company's debt, in this case Century Enka has ₹2.91b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of ₹1.1b, being 129% of its EBIT. So is Century Enka's debt a risk? It doesn't seem so to us. 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. For example, we've discovered 4 warning signs for Century Enka (1 is concerning!) that you should be aware of before investing here.

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. 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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