These 4 Measures Indicate That Computer Age Management Services (NSE:CAMS) Is Using Debt Safely

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Computer Age Management Services Limited (NSE:CAMS) makes use of debt. But the more important question is: how much risk is that debt creating?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, 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.

View our latest analysis for Computer Age Management Services

What Is Computer Age Management Services's Net Debt?

The chart below, which you can click on for greater detail, shows that Computer Age Management Services had ₹963.1m in debt in March 2024; about the same as the year before. But on the other hand it also has ₹6.16b in cash, leading to a ₹5.20b net cash position.

How Healthy Is Computer Age Management Services' Balance Sheet?

The latest balance sheet data shows that Computer Age Management Services had liabilities of ₹3.06b due within a year, and liabilities of ₹1.93b falling due after that. Offsetting these obligations, it had cash of ₹6.16b as well as receivables valued at ₹1.87b due within 12 months. So it actually has ₹3.05b 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 ₹218.9b 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.

Another good sign is that Computer Age Management Services has been able to increase its EBIT by 28% in twelve months, making it easier to pay down debt. There's no doubt that we learn most about debt from the balance sheet. 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Computer Age Management Services 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. Over the most recent three years, Computer Age Management Services recorded free cash flow worth 75% 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 ₹5.20b in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 28% over the last year. So is Computer Age Management Services'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. However, not all investment risk resides within the balance sheet - far from it. For example - Computer Age Management Services has 2 warning signs we think you should be aware of.

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.