Kernex Microsystems (India) (NSE:KERNEX) Takes On Some Risk With Its Use Of Debt

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. We note that Kernex Microsystems (India) Limited (NSE:KERNEX) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

AI is about to change healthcare. These 20 stocks are working on everything from early diagnostics to drug discovery. The best part - they are all under $10bn in marketcap - there is still time to get in early.

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Kernex Microsystems (India)'s Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2025 Kernex Microsystems (India) had ₹888.7m of debt, an increase on ₹318.6m, over one year. However, because it has a cash reserve of ₹321.7m, its net debt is less, at about ₹567.0m.

How Strong Is Kernex Microsystems (India)'s Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Kernex Microsystems (India) had liabilities of ₹2.82b due within 12 months and liabilities of ₹67.4m due beyond that. Offsetting these obligations, it had cash of ₹321.7m as well as receivables valued at ₹902.7m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹1.66b.

Of course, Kernex Microsystems (India) has a market capitalization of ₹19.1b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse.

See our latest analysis for Kernex Microsystems (India)

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Kernex Microsystems (India) has net debt of just 1.1 times EBITDA, indicating that it is certainly not a reckless borrower. And it boasts interest cover of 8.5 times, which is more than adequate. It was also good to see that despite losing money on the EBIT line last year, Kernex Microsystems (India) turned things around in the last 12 months, delivering and EBIT of ₹492m. When analysing debt levels, the balance sheet is the obvious place to start. But it is Kernex Microsystems (India)'s earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So it's worth checking how much of the earnings before interest and tax (EBIT) is backed by free cash flow. During the last year, Kernex Microsystems (India) burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Our View

Kernex Microsystems (India)'s struggle to convert EBIT to free cash flow had us second guessing its balance sheet strength, but the other data-points we considered were relatively redeeming. For example, its interest cover is relatively strong. We think that Kernex Microsystems (India)'s debt does make it a bit risky, after considering the aforementioned data points together. That's not necessarily a bad thing, since leverage can boost returns on equity, but it is something to be aware of. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 2 warning signs for Kernex Microsystems (India) (1 is potentially serious!) that you should be aware of before investing here.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.