Is CMS Info Systems (NSE:CMSINFO) A Risky Investment?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that CMS Info Systems Limited (NSE:CMSINFO) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for CMS Info Systems

How Much Debt Does CMS Info Systems Carry?

You can click the graphic below for the historical numbers, but it shows that CMS Info Systems had ₹1.81b of debt in March 2024, down from ₹2.03b, one year before. However, it does have ₹6.25b in cash offsetting this, leading to net cash of ₹4.44b.

How Healthy Is CMS Info Systems' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that CMS Info Systems had liabilities of ₹5.52b due within 12 months and liabilities of ₹1.60b due beyond that. On the other hand, it had cash of ₹6.25b and ₹7.50b worth of receivables due within a year. So it actually has ₹6.63b more liquid assets than total liabilities.

This short term liquidity is a sign that CMS Info Systems could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that CMS Info Systems has more cash than debt is arguably a good indication that it can manage its debt safely.

Fortunately, CMS Info Systems grew its EBIT by 6.8% in the last year, making that debt load look even more manageable. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if CMS Info Systems can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While CMS Info Systems 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. In the last three years, CMS Info Systems's free cash flow amounted to 50% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that CMS Info Systems has net cash of ₹4.44b, as well as more liquid assets than liabilities. On top of that, it increased its EBIT by 6.8% in the last twelve months. So we don't think CMS Info Systems's use of debt is risky. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for CMS Info Systems you should know about.

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.