Kernex Microsystems (India) (NSE:KERNEX) Is Carrying A Fair Bit Of Debt

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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Kernex Microsystems (India) Limited (NSE:KERNEX) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Kernex Microsystems (India)

How Much Debt Does Kernex Microsystems (India) Carry?

The image below, which you can click on for greater detail, shows that Kernex Microsystems (India) had debt of ₹150.7m at the end of September 2020, a reduction from ₹238.3m over a year. However, it also had ₹131.8m in cash, and so its net debt is ₹18.9m.

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

The latest balance sheet data shows that Kernex Microsystems (India) had liabilities of ₹212.8m due within a year, and liabilities of ₹35.3m falling due after that. Offsetting these obligations, it had cash of ₹131.8m as well as receivables valued at ₹116.2m due within 12 months. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.

Having regard to Kernex Microsystems (India)'s size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the ₹435.6m company is short on cash, but still worth keeping an eye on the balance sheet. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Kernex Microsystems (India)'s earnings that will influence how the balance sheet holds up in the future. 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) had a loss before interest and tax, and actually shrunk its revenue by 72%, to ₹50m. That makes us nervous, to say the least.

Caveat Emptor

While Kernex Microsystems (India)'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 ₹49m 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. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled ₹187m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. 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. Be aware that Kernex Microsystems (India) is showing 4 warning signs in our investment analysis , and 3 of those 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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