Datamatics Global Services (NSE:DATAMATICS) Could Easily Take On More Debt

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.' 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 Datamatics Global Services Limited (NSE:DATAMATICS) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Datamatics Global Services

How Much Debt Does Datamatics Global Services Carry?

You can click the graphic below for the historical numbers, but it shows that as of March 2022 Datamatics Global Services had ₹630.2m of debt, an increase on ₹200.7m, over one year. However, it does have ₹4.26b in cash offsetting this, leading to net cash of ₹3.63b.

How Healthy Is Datamatics Global Services' Balance Sheet?

According to the last reported balance sheet, Datamatics Global Services had liabilities of ₹2.16b due within 12 months, and liabilities of ₹403.4m due beyond 12 months. Offsetting this, it had ₹4.26b in cash and ₹3.25b in receivables that were due within 12 months. So it can boast ₹4.94b more liquid assets than total liabilities.

It's good to see that Datamatics Global Services has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, Datamatics Global Services boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Datamatics Global Services has boosted its EBIT by 42%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Datamatics Global Services will need earnings to service that debt. 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Datamatics Global 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. During the last three years, Datamatics Global Services generated free cash flow amounting to a very robust 97% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While it is always sensible to investigate a company's debt, in this case Datamatics Global Services has ₹3.63b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of ₹1.6b, being 97% of its EBIT. The bottom line is that we do not find Datamatics Global Services's debt levels at all concerning. 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. To that end, you should be aware of the 1 warning sign we've spotted with Datamatics Global Services .

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.