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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Cemtrex, Inc. (NASDAQ:CETX) makes use of debt. But the more important question is: how much risk is that debt creating?
When Is Debt Dangerous?
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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is Cemtrex's Debt?
As you can see below, Cemtrex had US$16.5m of debt at June 2020, down from US$23.0m a year prior. However, it also had US$14.7m in cash, and so its net debt is US$1.74m.
How Strong Is Cemtrex's Balance Sheet?
According to the last reported balance sheet, Cemtrex had liabilities of US$14.0m due within 12 months, and liabilities of US$15.3m due beyond 12 months. Offsetting these obligations, it had cash of US$14.7m as well as receivables valued at US$6.74m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$7.9m.
Cemtrex has a market capitalization of US$20.6m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Cemtrex'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.
While it hasn't made a profit, at least Cemtrex booked its first revenue as a publicly listed company, in the last twelve months.
Importantly, Cemtrex had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable US$6.3m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through US$6.3m of cash over the last year. 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. Consider for instance, the ever-present spectre of investment risk. We've identified 5 warning signs with Cemtrex (at least 3 which are a bit unpleasant) , and understanding them should be part of your investment process.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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