Is Cambridge Technology Enterprises (NSE:CTE) Using Too Much Debt?

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. We note that Cambridge Technology Enterprises Limited (NSE:CTE) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Cambridge Technology Enterprises

How Much Debt Does Cambridge Technology Enterprises Carry?

You can click the graphic below for the historical numbers, but it shows that as of March 2022 Cambridge Technology Enterprises had ₹331.4m of debt, an increase on ₹128.1m, over one year. But it also has ₹359.5m in cash to offset that, meaning it has ₹28.1m net cash.

A Look At Cambridge Technology Enterprises' Liabilities

We can see from the most recent balance sheet that Cambridge Technology Enterprises had liabilities of ₹289.0m falling due within a year, and liabilities of ₹200.9m due beyond that. Offsetting this, it had ₹359.5m in cash and ₹284.6m in receivables that were due within 12 months. So it actually has ₹154.2m more liquid assets than total liabilities.

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

Even more impressive was the fact that Cambridge Technology Enterprises grew its EBIT by 168% over twelve months. That boost will make it even easier to pay down debt going forward. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Cambridge Technology Enterprises 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. Cambridge Technology Enterprises 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, Cambridge Technology Enterprises burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Cambridge Technology Enterprises has net cash of ₹28.1m, as well as more liquid assets than liabilities. And we liked the look of last year's 168% year-on-year EBIT growth. So we are not troubled with Cambridge Technology Enterprises's debt use. 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. For example, we've discovered 4 warning signs for Cambridge Technology Enterprises (3 shouldn't be ignored!) that you should be aware of before investing here.

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.