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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 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 Century Enka Limited (NSE:CENTENKA) does use debt in its business. But the more important question is: how much risk is that debt creating?
When Is Debt Dangerous?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.
Check out our latest analysis for Century Enka
What Is Century Enka's Debt?
The image below, which you can click on for greater detail, shows that Century Enka had debt of ₹325.6m at the end of March 2019, a reduction from ₹469.5m over a year. But on the other hand it also has ₹1.64b in cash, leading to a ₹1.31b net cash position.
How Strong Is Century Enka's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Century Enka had liabilities of ₹1.29b due within 12 months and liabilities of ₹1.47b due beyond that. Offsetting this, it had ₹1.64b in cash and ₹2.50b in receivables that were due within 12 months. So it can boast ₹1.38b more liquid assets than total liabilities.
This luscious liquidity implies that Century Enka's balance sheet is sturdy like a giant sequoia tree. With this in mind one could posit that its balance sheet is as strong as beautiful a rare rhino. Simply put, the fact that Century Enka has more cash than debt is arguably a good indication that it can manage its debt safely.
But the other side of the story is that Century Enka saw its EBIT decline by 4.5% over the last year. That sort of decline, if sustained, will obviously make debt harder to handle. When analysing debt levels, the balance sheet is the obvious place to start. But it is Century Enka's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.