Would Cerebra Integrated Technologies (NSE:CEREBRAINT) Be Better Off With Less Debt?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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 Cerebra Integrated Technologies Limited (NSE:CEREBRAINT) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Cerebra Integrated Technologies

What Is Cerebra Integrated Technologies's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2023 Cerebra Integrated Technologies had ₹409.3m of debt, an increase on ₹348.6m, over one year. However, it does have ₹10.1m in cash offsetting this, leading to net debt of about ₹399.2m.

A Look At Cerebra Integrated Technologies' Liabilities

The latest balance sheet data shows that Cerebra Integrated Technologies had liabilities of ₹1.38b due within a year, and liabilities of ₹7.99m falling due after that. On the other hand, it had cash of ₹10.1m and ₹1.23b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹147.5m.

Since publicly traded Cerebra Integrated Technologies shares are worth a total of ₹935.1m, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Cerebra Integrated Technologies 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.

Over 12 months, Cerebra Integrated Technologies made a loss at the EBIT level, and saw its revenue drop to ₹511m, which is a fall of 75%. That makes us nervous, to say the least.

Caveat Emptor

While Cerebra Integrated Technologies's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost a very considerable ₹190m 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 ₹34m in negative free cash flow over the last twelve months. So to be blunt we think it 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. For example Cerebra Integrated Technologies has 2 warning signs (and 1 which shouldn't be ignored) we think you should know about.

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.