David Iben said it well when he said: “Volatility is not a risk that interests us. What matters to us is to avoid the permanent loss of capital. So it seems smart money knows that debt – which is usually involved in bankruptcies – is a very important factor when you’re assessing a company’s risk. We notice that CL Educate Limited (NSE:CLEDUCATE) has a debt on its balance sheet. But should shareholders worry about its use of debt?
What risk does debt carry?
Debt helps a business until the business struggles to pay it back, either with new capital or with free cash flow. If things go really bad, lenders can take over the business. However, a more common (but still painful) scenario is that it has to raise new equity at a low price, thereby permanently diluting shareholders. By replacing dilution, however, debt can be a great tool for companies that need capital to invest in growth at high rates of return. The first step when considering a company’s debt levels is to consider its cash and debt together.
Check out our latest analysis for CL Educate
What is CL Educate’s net debt?
As you can see below, CL Educate had a debt of ₹417.6 million as of September 2021, up from ₹462.7 million the previous year. However, he has ₹644.0 million in cash offsetting this, resulting in a net cash of ₹226.4 million.
How strong is CL Educate’s balance sheet?
Zooming in on the latest balance sheet data, we can see that CL Educate had liabilities of ₹963.4 million due within 12 months and liabilities of ₹126.7 million due beyond. On the other hand, it had cash of ₹644.0 million and ₹722.5 million of receivables due within one year. So he actually has ₹276.4 million Following liquid assets than total liabilities.
This surplus suggests that CL Educate has a conservative balance sheet, and could probably eliminate its debt without too much difficulty. In short, CL Educate has net cash, so it’s fair to say that they don’t have a lot of debt! There is no doubt that we learn the most about debt from the balance sheet. But you can’t look at debt in total isolation; since CL Educate will need income to repay this debt. So, when considering debt, it is definitely worth looking at the earnings trend. Click here for an interactive preview.
Last year, CL Educate was not profitable on an EBIT level, but managed to grow its revenue by 4.2% to ₹2.0 billion. This rate of growth is a bit slow for our liking, but it takes all types to make a world.
So how risky is CL Educate?
Although CL Educate posted a loss in Earnings Before Interest and Tax (EBIT) in the past twelve months, it generated a positive free cash flow of ₹18 million. So taking that at face value and given the net cash position, we don’t think the stock is too risky in the near term. With lackluster revenue growth over the past year, we don’t find the investment opportunity particularly attractive. There is no doubt that we learn the most about debt from the balance sheet. However, not all investment risks reside on the balance sheet, far from it. To do this, you need to find out about the 2 warning signs we spotted some with CL Educate (including 1 essential).
In the end, it’s often best to focus on companies that aren’t in debt. You can access our special list of these companies (all with a track record of earnings growth). It’s free.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.
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