Here's Why Kernex Microsystems (India) (NSE:KERNEX) Can Afford Some 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 can see that Kernex Microsystems (India) Limited (NSE:KERNEX) does use debt in its business. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Kernex Microsystems (India)

How Much Debt Does Kernex Microsystems (India) Carry?

As you can see below, at the end of March 2024, Kernex Microsystems (India) had ₹279.9m of debt, up from ₹107.0m a year ago. Click the image for more detail. On the flip side, it has ₹192.3m in cash leading to net debt of about ₹87.6m.

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

According to the last reported balance sheet, Kernex Microsystems (India) had liabilities of ₹511.7m due within 12 months, and liabilities of ₹13.5m due beyond 12 months. On the other hand, it had cash of ₹192.3m and ₹21.6m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹311.3m.

Of course, Kernex Microsystems (India) has a market capitalization of ₹8.96b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Carrying virtually no net debt, Kernex Microsystems (India) has a very light debt load indeed. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Kernex Microsystems (India) 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.

In the last year Kernex Microsystems (India) wasn't profitable at an EBIT level, but managed to grow its revenue by 385%, to ₹196m. 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 ₹257m 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 ₹764m in negative free cash flow over the last twelve months. So in short it's a really risky stock. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 4 warning signs for Kernex Microsystems (India) (of which 2 are concerning!) you should know about.

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.

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