Is 8K Miles Software Services (NSE:8KMILES) Using Too Much 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 can see that 8K Miles Software Services Limited (NSE:8KMILES) does use debt in its business. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

Check out our latest analysis for 8K Miles Software Services

How Much Debt Does 8K Miles Software Services Carry?

The chart below, which you can click on for greater detail, shows that 8K Miles Software Services had ₹1.18b in debt in March 2020; about the same as the year before. However, because it has a cash reserve of ₹79.3m, its net debt is less, at about ₹1.10b.

How Strong Is 8K Miles Software Services's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that 8K Miles Software Services had liabilities of ₹1.55b due within 12 months and liabilities of ₹568.4m due beyond that. On the other hand, it had cash of ₹79.3m and ₹505.7m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹1.5b.

The deficiency here weighs heavily on the ₹758.4m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. At the end of the day, 8K Miles Software Services would probably need a major re-capitalization if its creditors were to demand repayment. The balance sheet is clearly the area to focus on when you are analysing debt. But it is 8K Miles Software Services'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.

Over 12 months, 8K Miles Software Services made a loss at the EBIT level, and saw its revenue drop to ₹3.8b, which is a fall of 55%. That makes us nervous, to say the least.

Caveat Emptor

Not only did 8K Miles Software Services's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping ₹381.0m. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. It's fair to say the loss of ₹5.0b didn't encourage us either; we'd like to see a profit. And until that time we think this is a risky stock. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Consider for instance, the ever-present spectre of investment risk. We've identified 2 warning signs with 8K Miles Software Services (at least 1 which can't be ignored) , and understanding them should be part of your investment process.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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