Does Kernex Microsystems (India) (NSE:KERNEX) Have A Healthy Balance Sheet?

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.' 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. As with many other companies Kernex Microsystems (India) Limited (NSE:KERNEX) makes use of debt. But the more important question is: how much risk is that debt creating?

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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Kernex Microsystems (India)

What Is Kernex Microsystems (India)'s Net Debt?

As you can see below, at the end of September 2021, Kernex Microsystems (India) had ₹182.4m of debt, up from ₹150.7m a year ago. Click the image for more detail. However, it does have ₹134.1m in cash offsetting this, leading to net debt of about ₹48.3m.

How Healthy Is Kernex Microsystems (India)'s Balance Sheet?

We can see from the most recent balance sheet that Kernex Microsystems (India) had liabilities of ₹277.4m falling due within a year, and liabilities of ₹35.4m due beyond that. On the other hand, it had cash of ₹134.1m and ₹113.3m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹65.4m.

Since publicly traded Kernex Microsystems (India) shares are worth a total of ₹1.06b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Kernex Microsystems (India) 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, Kernex Microsystems (India) reported revenue of ₹216m, which is a gain of 570%, although it did not report any earnings before interest and tax. When it comes to revenue growth, that's like nailing the game winning 3-pointer!

Caveat Emptor

Despite the top line growth, Kernex Microsystems (India) still had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost ₹11m 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. We would feel better if it turned its trailing twelve month loss of ₹25m into a profit. So we do think this stock is quite risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 4 warning signs for Kernex Microsystems (India) that you should be aware of.

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.

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.

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