Warren Buffett said: “Volatility is far from synonymous with risk”. It’s only natural to consider a company’s balance sheet when looking at its level of risk, as debt is often involved when a business collapses. Like many other companies Cyient Limited (NSE: CYIENT) uses the debt. But should shareholders be concerned about its use of debt?
When is debt dangerous?
Debts and other liabilities become risky for a business when it cannot easily meet these obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a business can go bankrupt if it cannot pay its creditors. However, a more common (but still costly) situation is where a company has to dilute its shareholders at a cheap share price just to get its debt under control. Of course, many companies use debt to finance their growth without negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash flow and debt together.
See our latest review for Cyient
What is Cyient’s net debt?
The image below, which you can click for more details, shows that Cyient was in debt of 5.28 billion yen at the end of June 2021, down from 7.11 billion yen on a year. However, his balance sheet shows that he holds 15.3 billion yen in cash, so he actually has net cash of 9.98 billion yen.
Is Cyient’s track record healthy?
The latest balance sheet data shows that Cyient had 13.2 billion yen in liabilities due within one year, and 4.05 billion yen liabilities due after that. On the other hand, he had 15.3 billion yen in cash and 7.50 billion yen in receivables due within a year. So he actually ₹ 5.48b Following liquid assets as total liabilities.
This surplus suggests that Cyient has a prudent balance sheet and could likely eliminate its debt without too much difficulty. Put simply, the fact that Cyient has more cash than debt is arguably a good indication that she can handle her debt safely.
On top of that, we are happy to report that Cyient has increased its EBIT by 40%, reducing the specter of future debt repayments. The balance sheet is clearly the area you need to focus on when analyzing debt. But it’s future profits, more than anything, that will determine Cyient’s ability to maintain a healthy balance sheet in the future. So if you are focused on the future you can check this out free report showing analysts’ earnings forecasts.
Finally, a business needs free cash flow to pay off debts; accounting profits are not enough. While Cyient has net cash on its balance sheet, it’s still worth looking at its ability to convert earnings before interest and taxes (EBIT) into free cash flow, to help us understand how fast it’s building (or erodes) that cash balance. . Fortunately for all shareholders, Cyient has actually generated more free cash flow than EBIT over the past three years. This kind of strong cash generation warms our hearts like a puppy in a bumblebee costume.
While it’s always a good idea to investigate a company’s debt, in this case Cyient has 9.98 billion yen in net cash and a decent looking balance sheet. And it impressed us with free cash flow of 6.3 billion euros, or 101% of its EBIT. So is Cyient’s debt a risk? It does not seem to us. When analyzing debt levels, the balance sheet is the obvious starting point. However, not all investment risks lie on the balance sheet – far from it. To do this, you need to know the 2 warning signs we spotted with Cyient.
At the end of the day, it’s often best to focus on businesses that don’t have net debt. You can access our special list of these companies (all with a history of profit growth). It’s free.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative material. Simply Wall St has no position in any of the stocks mentioned.
Do you have any feedback on this item? Are you worried about the content? Get in touch with us directly. You can also send an email to the editorial team (at) simplywallst.com.
If you are looking to trade Cyient, open an account with the cheapest * professional approved platform, Interactive Brokers. Their clients from more than 200 countries and territories trade stocks, options, futures, currencies, bonds and funds around the world from a single integrated account.Promoted