Does Datamatics Global Services (NSE:DATAMATICS) Have A Healthy Balance Sheet?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Datamatics Global Services Limited (NSE:DATAMATICS) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Datamatics Global Services

How Much Debt Does Datamatics Global Services Carry?

The image below, which you can click on for greater detail, shows that Datamatics Global Services had debt of ₹200.7m at the end of March 2021, a reduction from ₹1.18b over a year. However, it does have ₹4.18b in cash offsetting this, leading to net cash of ₹3.98b.

A Look At Datamatics Global Services' Liabilities

We can see from the most recent balance sheet that Datamatics Global Services had liabilities of ₹1.55b falling due within a year, and liabilities of ₹382.9m due beyond that. Offsetting these obligations, it had cash of ₹4.18b as well as receivables valued at ₹1.84b due within 12 months. So it actually has ₹4.09b more liquid assets than total liabilities.

This surplus suggests that Datamatics Global Services is using debt in a way that is appears to be both safe and conservative. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Simply put, the fact that Datamatics Global Services has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, Datamatics Global Services grew its EBIT by 48% over the last twelve months, and that growth will make it easier to handle its debt. 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 produced sturdy free cash flow equating to 76% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Datamatics Global Services has net cash of ₹3.98b, as well as more liquid assets than liabilities. And we liked the look of last year's 48% year-on-year EBIT growth. 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. For instance, we've identified 2 warning signs for Datamatics Global Services that you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.
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