Semac Consultants (NSE:REVATHI) Seems To Use Debt Rather Sparingly

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 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. Importantly, Semac Consultants Limited (NSE:REVATHI) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. 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 Semac Consultants

What Is Semac Consultants's Debt?

The image below, which you can click on for greater detail, shows that at March 2023 Semac Consultants had debt of ₹387.3m, up from ₹289.1m in one year. However, its balance sheet shows it holds ₹817.9m in cash, so it actually has ₹430.6m net cash.

How Healthy Is Semac Consultants' Balance Sheet?

The latest balance sheet data shows that Semac Consultants had liabilities of ₹1.66b due within a year, and liabilities of ₹147.7m falling due after that. Offsetting these obligations, it had cash of ₹817.9m as well as receivables valued at ₹915.5m due within 12 months. So it has liabilities totalling ₹71.9m more than its cash and near-term receivables, combined.

Having regard to Semac Consultants' size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the ₹5.04b company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, Semac Consultants also has more cash than debt, so we're pretty confident it can manage its debt safely.

Even more impressive was the fact that Semac Consultants grew its EBIT by 165% over twelve months. That boost will make it even easier to pay down debt going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Semac Consultants will need earnings to service that debt. 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. Semac Consultants may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last two years, Semac Consultants produced sturdy free cash flow equating to 80% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Semac Consultants has ₹430.6m in net cash. And it impressed us with its EBIT growth of 165% over the last year. So is Semac Consultants's debt a risk? It doesn't seem so to us. 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. Case in point: We've spotted 4 warning signs for Semac Consultants you should be aware of.

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.

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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.