Here's Why IntraSoft Technologies (NSE:ISFT) Can Manage Its Debt Responsibly

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. We can see that IntraSoft Technologies Limited (NSE:ISFT) does use debt in its business. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.

View our latest analysis for IntraSoft Technologies

What Is IntraSoft Technologies's Debt?

You can click the graphic below for the historical numbers, but it shows that IntraSoft Technologies had ₹893.4m of debt in March 2021, down from ₹971.2m, one year before. However, because it has a cash reserve of ₹784.7m, its net debt is less, at about ₹108.7m.

How Strong Is IntraSoft Technologies' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that IntraSoft Technologies had liabilities of ₹285.9m due within 12 months and liabilities of ₹1.01b due beyond that. On the other hand, it had cash of ₹784.7m and ₹19.6m worth of receivables due within a year. So its liabilities total ₹494.8m more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since IntraSoft Technologies has a market capitalization of ₹1.62b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

While IntraSoft Technologies's low debt to EBITDA ratio of 0.74 suggests only modest use of debt, the fact that EBIT only covered the interest expense by 3.7 times last year does give us pause. But the interest payments are certainly sufficient to have us thinking about how affordable its debt is. Pleasingly, IntraSoft Technologies is growing its EBIT faster than former Australian PM Bob Hawke downs a yard glass, boasting a 308% gain in the last twelve months. The balance sheet is clearly the area to focus on when you are analysing debt. But it is IntraSoft Technologies's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So we clearly need to look at whether that EBIT is leading to corresponding free cash flow. During the last three years, IntraSoft Technologies burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Our View

Based on what we've seen IntraSoft Technologies is not finding it easy, given its conversion of EBIT to free cash flow, but the other factors we considered give us cause to be optimistic. There's no doubt that its ability to to grow its EBIT is pretty flash. Looking at all this data makes us feel a little cautious about IntraSoft Technologies's debt levels. While debt does have its upside in higher potential returns, we think shareholders should definitely consider how debt levels might make the stock more risky. 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. Be aware that IntraSoft Technologies is showing 5 warning signs in our investment analysis , and 1 of those is a bit unpleasant...

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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