Is Latent View Analytics (NSE:LATENTVIEW) Using Too Much Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. We can see that Latent View Analytics Limited (NSE:LATENTVIEW) 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 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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Latent View Analytics

What Is Latent View Analytics's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2023 Latent View Analytics had ₹247.5m of debt, an increase on ₹237.2m, over one year. But it also has ₹9.15b in cash to offset that, meaning it has ₹8.91b net cash.

A Look At Latent View Analytics' Liabilities

The latest balance sheet data shows that Latent View Analytics had liabilities of ₹452.6m due within a year, and liabilities of ₹253.3m falling due after that. Offsetting these obligations, it had cash of ₹9.15b as well as receivables valued at ₹1.12b due within 12 months. So it can boast ₹9.57b more liquid assets than total liabilities.

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

On the other hand, Latent View Analytics's EBIT dived 15%, over the last year. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Latent View Analytics 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Latent View Analytics 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. During the last three years, Latent View Analytics 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 Latent View Analytics has ₹8.91b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of ₹1.0b, being 74% of its EBIT. So we don't have any problem with Latent View Analytics's use of debt. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Latent View Analytics's earnings per share history for free.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.