Is Krsnaa Diagnostics (NSE:KRSNAA) A Risky Investment?

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 Krsnaa Diagnostics Limited (NSE:KRSNAA) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Krsnaa Diagnostics

What Is Krsnaa Diagnostics's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2023 Krsnaa Diagnostics had ₹1.09b of debt, an increase on ₹626.3m, over one year. But on the other hand it also has ₹2.03b in cash, leading to a ₹933.0m net cash position.

A Look At Krsnaa Diagnostics' Liabilities

Zooming in on the latest balance sheet data, we can see that Krsnaa Diagnostics had liabilities of ₹2.41b due within 12 months and liabilities of ₹815.7m due beyond that. Offsetting these obligations, it had cash of ₹2.03b as well as receivables valued at ₹1.59b due within 12 months. So it actually has ₹389.5m more liquid assets than total liabilities.

This surplus suggests that Krsnaa Diagnostics has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Krsnaa Diagnostics boasts net cash, so it's fair to say it does not have a heavy debt load!

But the other side of the story is that Krsnaa Diagnostics saw its EBIT decline by 2.6% over the last year. That sort of decline, if sustained, will obviously make debt harder to handle. 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 Krsnaa Diagnostics's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Krsnaa Diagnostics 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. During the last three years, Krsnaa Diagnostics burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While it is always sensible to investigate a company's debt, in this case Krsnaa Diagnostics has ₹933.0m in net cash and a decent-looking balance sheet. So we don't have any problem with Krsnaa Diagnostics's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example - Krsnaa Diagnostics has 2 warning signs we think you should be aware of.

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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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.