These 4 Measures Indicate That Cupid (NSE:CUPID) Is Using Debt Reasonably Well

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. Importantly, Cupid Limited (NSE:CUPID) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. 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 Cupid

What Is Cupid's Net Debt?

The chart below, which you can click on for greater detail, shows that Cupid had ₹120.2m in debt in September 2020; about the same as the year before. But it also has ₹597.5m in cash to offset that, meaning it has ₹477.4m net cash.

How Strong Is Cupid's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Cupid had liabilities of ₹303.7m due within 12 months and liabilities of ₹21.3m due beyond that. Offsetting this, it had ₹597.5m in cash and ₹255.3m in receivables that were due within 12 months. So it can boast ₹527.8m more liquid assets than total liabilities.

It's good to see that Cupid has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, Cupid boasts net cash, so it's fair to say it does not have a heavy debt load!

Also good is that Cupid grew its EBIT at 14% over the last year, further increasing its ability to manage debt. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Cupid will need earnings to service that debt. 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Cupid 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. In the last three years, Cupid's free cash flow amounted to 23% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing up

While it is always sensible to investigate a company's debt, in this case Cupid has ₹477.4m in net cash and a decent-looking balance sheet. And it also grew its EBIT by 14% over the last year. So we don't think Cupid's use of debt is risky. 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. Take risks, for example - Cupid has 2 warning signs we think you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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