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, CL Educate Limited (NSE:CLEDUCATE) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

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What Is CL Educate's Net Debt?

The chart below, which you can click on for greater detail, shows that CL Educate had ₹519.6m in debt in March 2019; about the same as the year before. But on the other hand it also has ₹600.3m in cash, leading to a ₹80.6m net cash position.

A Look At CL Educate's Liabilities

According to the last reported balance sheet, CL Educate had liabilities of ₹1.38b due within 12 months, and liabilities of ₹173.2m due beyond 12 months. Offsetting this, it had ₹600.3m in cash and ₹1.64b in receivables that were due within 12 months. So it can boast ₹689.5m more liquid assets than total liabilities.

This surplus liquidity suggests that CL Educate's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. With this in mind one could posit that its balance sheet is as strong as beautiful a rare rhino. Simply put, the fact that CL Educate has more cash than debt is arguably a good indication that it can manage its debt safely.

Notably, CL Educate's EBIT launched higher than Elon Musk, gaining a whopping 188% on last year. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since CL Educate 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.