Is C. E. Info Systems (NSE:MAPMYINDIA) 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, C. E. Info Systems Limited (NSE:MAPMYINDIA) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for C. E. Info Systems

What Is C. E. Info Systems's Net Debt?

As you can see below, at the end of March 2024, C. E. Info Systems had ₹184.0m of debt, up from ₹174.7m a year ago. Click the image for more detail. However, it does have ₹2.84b in cash offsetting this, leading to net cash of ₹2.66b.

How Strong Is C. E. Info Systems' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that C. E. Info Systems had liabilities of ₹1.19b due within 12 months and liabilities of ₹129.1m due beyond that. Offsetting these obligations, it had cash of ₹2.84b as well as receivables valued at ₹1.14b due within 12 months. So it actually has ₹2.66b more liquid assets than total liabilities.

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

Another good sign is that C. E. Info Systems has been able to increase its EBIT by 28% in twelve months, making it easier to pay down debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if C. E. Info Systems can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While C. E. Info Systems has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Looking at the most recent three years, C. E. Info Systems recorded free cash flow of 41% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that C. E. Info Systems has net cash of ₹2.66b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 28% over the last year. So is C. E. Info Systems's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 2 warning signs for C. E. Info Systems you should be aware of, and 1 of them is potentially serious.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.