Is Computer Age Management Services (NSE:CAMS) A Risky Investment?

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. Importantly, Computer Age Management Services Limited (NSE:CAMS) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.

View our latest analysis for Computer Age Management Services

What Is Computer Age Management Services's Debt?

As you can see below, Computer Age Management Services had ₹947.5m of debt, at September 2024, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has ₹7.33b in cash, leading to a ₹6.38b net cash position.

How Healthy Is Computer Age Management Services' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Computer Age Management Services had liabilities of ₹2.91b due within 12 months and liabilities of ₹1.90b due beyond that. Offsetting this, it had ₹7.33b in cash and ₹799.4m in receivables that were due within 12 months. So it actually has ₹3.32b more liquid assets than total liabilities.

Having regard to Computer Age Management Services' size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the ₹166.7b company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that Computer Age Management Services has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, Computer Age Management Services grew its EBIT by 40% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Computer Age Management Services's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Computer Age Management Services 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. Over the most recent three years, Computer Age Management Services recorded free cash flow worth 77% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While it is always sensible to investigate a company's debt, in this case Computer Age Management Services has ₹6.38b in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 40% over the last year. So is Computer Age Management Services's debt a risk? It doesn't seem so to us. 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. To that end, you should be aware of the 2 warning signs we've spotted with Computer Age Management Services .

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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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.