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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. 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. As with many other companies Cigniti Technologies Limited (NSE:CIGNITITEC) makes use of debt. But should shareholders be worried about its use of debt?
Why Does Debt Bring Risk?
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. If things get really bad, the lenders can take control of the business. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.
See our latest analysis for Cigniti Technologies
How Much Debt Does Cigniti Technologies Carry?
You can click the graphic below for the historical numbers, but it shows that Cigniti Technologies had ₹736.9m of debt in March 2019, down from ₹1.31b, one year before. However, it also had ₹615.6m in cash, and so its net debt is ₹121.3m.
A Look At Cigniti Technologies's Liabilities
According to the last reported balance sheet, Cigniti Technologies had liabilities of ₹1.49b due within 12 months, and liabilities of ₹74.7m due beyond 12 months. Offsetting these obligations, it had cash of ₹615.6m as well as receivables valued at ₹1.56b due within 12 months. So it actually has ₹608.2m more liquid assets than total liabilities.
This short term liquidity is a sign that Cigniti Technologies could probably pay off its debt with ease, as its balance sheet is far from stretched. Carrying virtually no net debt, Cigniti Technologies has a very light debt load indeed.
We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).