We Think Computer Age Management Services (NSE:CAMS) Can Manage Its Debt With Ease

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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 Computer Age Management Services Limited (NSE:CAMS) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. 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 Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2023 Computer Age Management Services had ₹960.7m of debt, an increase on ₹852.6m, over one year. But on the other hand it also has ₹6.25b in cash, leading to a ₹5.29b net cash position.

How Strong Is Computer Age Management Services' Balance Sheet?

According to the last reported balance sheet, Computer Age Management Services had liabilities of ₹2.31b due within 12 months, and liabilities of ₹2.13b due beyond 12 months. Offsetting these obligations, it had cash of ₹6.25b as well as receivables valued at ₹551.4m due within 12 months. So it can boast ₹2.36b 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 ₹149.5b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, Computer Age Management Services boasts net cash, so it's fair to say it does not have a heavy debt load!

And we also note warmly that Computer Age Management Services grew its EBIT by 10% last year, making its debt load easier to handle. 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 Computer Age Management Services 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. 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. During the last three years, Computer Age Management Services produced sturdy free cash flow equating to 74% 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 investigate a company's debt, in this case Computer Age Management Services has ₹5.29b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 74% of that EBIT to free cash flow, bringing in ₹3.0b. So is Computer Age Management Services's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. We've identified 1 warning sign with Computer Age Management Services , and understanding them should be part of your investment process.

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.