Is Cigniti Technologies (NSE:CIGNITITEC) A Risky Investment?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Cigniti Technologies Limited (NSE:CIGNITITEC) does carry debt. But the more important question is: how much risk is that debt creating?

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. 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 step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Cigniti Technologies

How Much Debt Does Cigniti Technologies Carry?

The image below, which you can click on for greater detail, shows that at September 2023 Cigniti Technologies had debt of ₹689.5m, up from ₹304.4m in one year. But it also has ₹2.91b in cash to offset that, meaning it has ₹2.23b net cash.

How Strong Is Cigniti Technologies' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Cigniti Technologies had liabilities of ₹2.12b due within 12 months and liabilities of ₹322.0m due beyond that. Offsetting this, it had ₹2.91b in cash and ₹2.87b in receivables that were due within 12 months. So it actually has ₹3.34b more liquid assets than total liabilities.

This short term liquidity is a sign that Cigniti Technologies could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Cigniti Technologies has more cash than debt is arguably a good indication that it can manage its debt safely.

Another good sign is that Cigniti Technologies has been able to increase its EBIT by 30% in twelve months, making it easier to pay down debt. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Cigniti Technologies will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Cigniti Technologies 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. Looking at the most recent three years, Cigniti Technologies recorded free cash flow of 46% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Cigniti Technologies has ₹2.23b in net cash and a decent-looking balance sheet. And we liked the look of last year's 30% year-on-year EBIT growth. So we don't think Cigniti Technologies's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 2 warning signs we've spotted with Cigniti Technologies .

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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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.