These 4 Measures Indicate That Prostarm Info Systems (NSE:PROSTARM) Is Using Debt Reasonably Well

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 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 Prostarm Info Systems Limited (NSE:PROSTARM) makes use of debt. But the more important question is: how much risk is that debt creating?

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Why Does Debt Bring Risk?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

How Much Debt Does Prostarm Info Systems Carry?

You can click the graphic below for the historical numbers, but it shows that Prostarm Info Systems had ₹162.3m of debt in September 2025, down from ₹672.3m, one year before. On the flip side, it has ₹137.9m in cash leading to net debt of about ₹24.4m.

A Look At Prostarm Info Systems' Liabilities

The latest balance sheet data shows that Prostarm Info Systems had liabilities of ₹709.1m due within a year, and liabilities of ₹30.0m falling due after that. On the other hand, it had cash of ₹137.9m and ₹1.09b worth of receivables due within a year. So it can boast ₹491.2m more liquid assets than total liabilities.

This surplus suggests that Prostarm Info Systems has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Carrying virtually no net debt, Prostarm Info Systems has a very light debt load indeed.

View our latest analysis for Prostarm Info Systems

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). 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).

Prostarm Info Systems has very modest net debt, giving rise to a debt to EBITDA ratio of 0.064. And EBIT easily covered the interest expense 9.9 times over, lending force to that view. But the other side of the story is that Prostarm Info Systems saw its EBIT decline by 8.9% over the last year. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. When analysing debt levels, the balance sheet is the obvious place to start. But it is Prostarm Info Systems's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So we clearly need to look at whether that EBIT is leading to corresponding free cash flow. During the last three years, Prostarm Info Systems 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

Based on what we've seen Prostarm Info Systems is not finding it easy, given its conversion of EBIT to free cash flow, but the other factors we considered give us cause to be optimistic. There's no doubt that its ability to handle its debt, based on its EBITDA, is pretty flash. When we consider all the factors mentioned above, we do feel a bit cautious about Prostarm Info Systems's use of debt. While we appreciate debt can enhance returns on equity, we'd suggest that shareholders keep close watch on its debt levels, lest they increase. 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 1 warning sign for Prostarm Info Systems that you should be aware of before investing here.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.