We Think Kernex Microsystems (India) (NSE:KERNEX) Has A Fair Chunk Of Debt

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. Importantly, Kernex Microsystems (India) Limited (NSE:KERNEX) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. 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. 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.

See our latest analysis for Kernex Microsystems (India)

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

The image below, which you can click on for greater detail, shows that at September 2022 Kernex Microsystems (India) had debt of ₹269.1m, up from ₹182.4m in one year. However, it also had ₹264.0m in cash, and so its net debt is ₹5.11m.

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

We can see from the most recent balance sheet that Kernex Microsystems (India) had liabilities of ₹346.7m falling due within a year, and liabilities of ₹14.9m due beyond that. Offsetting this, it had ₹264.0m in cash and ₹94.7m in receivables that were due within 12 months. So these liquid assets roughly match the total liabilities.

Having regard to Kernex Microsystems (India)'s size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the ₹4.01b company is struggling for cash, we still think it's worth monitoring its balance sheet. Carrying virtually no net debt, Kernex Microsystems (India) has a very light debt load indeed. 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 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 78%, to ₹44m. That makes us nervous, to say the least.

Caveat Emptor

Not only did Kernex Microsystems (India)'s revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at ₹151m. 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 ₹98m 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. Be aware that Kernex Microsystems (India) is showing 4 warning signs in our investment analysis , and 2 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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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.