We Think Zen Technologies (NSE:ZENTEC) Can Stay On Top Of Its Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We can see that Zen Technologies Limited (NSE:ZENTEC) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

How Much Debt Does Zen Technologies Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Zen Technologies had ₹665.2m of debt, an increase on ₹18.8m, over one year. But it also has ₹11.1b in cash to offset that, meaning it has ₹10.4b net cash.

A Look At Zen Technologies' Liabilities

The latest balance sheet data shows that Zen Technologies had liabilities of ₹2.52b due within a year, and liabilities of ₹537.7m falling due after that. Offsetting these obligations, it had cash of ₹11.1b as well as receivables valued at ₹4.24b due within 12 months. So it actually has ₹12.2b more liquid assets than total liabilities.

This surplus suggests that Zen Technologies has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Zen Technologies boasts net cash, so it's fair to say it does not have a heavy debt load!

Check out our latest analysis for Zen Technologies

In addition to that, we're happy to report that Zen Technologies has boosted its EBIT by 75%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Zen Technologies can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Zen Technologies has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Considering the last three years, Zen Technologies actually recorded a cash outflow, overall. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Zen Technologies has net cash of ₹10.4b, as well as more liquid assets than liabilities. And we liked the look of last year's 75% year-on-year EBIT growth. So we are not troubled with Zen Technologies's debt use. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Zen Technologies you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.