Is SecureKloud Technologies (NSE:SECURKLOUD) A Risky Investment?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 can see that SecureKloud Technologies Limited (NSE:SECURKLOUD) 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for SecureKloud Technologies

What Is SecureKloud Technologies's Net Debt?

As you can see below, SecureKloud Technologies had ₹1.39b of debt, at September 2021, which is about the same as the year before. You can click the chart for greater detail. However, it does have ₹109.4m in cash offsetting this, leading to net debt of about ₹1.28b.

How Strong Is SecureKloud Technologies' Balance Sheet?

The latest balance sheet data shows that SecureKloud Technologies had liabilities of ₹1.62b due within a year, and liabilities of ₹566.2m falling due after that. On the other hand, it had cash of ₹109.4m and ₹616.9m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹1.46b.

SecureKloud Technologies has a market capitalization of ₹3.41b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since SecureKloud 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.

Over 12 months, SecureKloud Technologies reported revenue of ₹3.6b, which is a gain of 5.9%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, SecureKloud Technologies had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable ₹661m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled ₹40m in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be risky. 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 5 warning signs for SecureKloud Technologies you should be aware of, and 2 of them don't sit too well with us.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.