Is Semac Consultants (NSE:SEMAC) Weighed On By Its Debt Load?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Semac Consultants Limited (NSE:SEMAC) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Semac Consultants

What Is Semac Consultants's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Semac Consultants had debt of ₹377.1m, up from ₹55.7m in one year. But on the other hand it also has ₹436.3m in cash, leading to a ₹59.1m net cash position.

How Strong Is Semac Consultants' Balance Sheet?

The latest balance sheet data shows that Semac Consultants had liabilities of ₹1.06b due within a year, and liabilities of ₹48.8m falling due after that. Offsetting this, it had ₹436.3m in cash and ₹338.3m in receivables that were due within 12 months. So it has liabilities totalling ₹331.5m more than its cash and near-term receivables, combined.

This deficit isn't so bad because Semac Consultants is worth ₹993.5m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. 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. When analysing debt levels, the balance sheet is the obvious place to start. 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.

In the last year Semac Consultants had a loss before interest and tax, and actually shrunk its revenue by 59%, to ₹1.1b. To be frank that doesn't bode well.

So How Risky Is Semac Consultants?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Semac Consultants had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through ₹203m of cash and made a loss of ₹361m. Given it only has net cash of ₹59.1m, the company may need to raise more capital if it doesn't reach break-even soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. 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 2 warning signs for Semac Consultants you should be aware of, and 1 of them shouldn't be ignored.

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.