Is Megasoft (NSE:MEGASOFT) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Megasoft Limited (NSE:MEGASOFT) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. If things get really bad, the lenders can take control of the business. 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, 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. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Megasoft

What Is Megasoft's Net Debt?

The image below, which you can click on for greater detail, shows that Megasoft had debt of ₹250.0m at the end of March 2022, a reduction from ₹304.3m over a year. However, its balance sheet shows it holds ₹372.4m in cash, so it actually has ₹122.4m net cash.

A Look At Megasoft's Liabilities

The latest balance sheet data shows that Megasoft had liabilities of ₹536.8m due within a year, and liabilities of ₹479.6m falling due after that. On the other hand, it had cash of ₹372.4m and ₹304.3m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹339.8m.

Of course, Megasoft has a market capitalization of ₹3.19b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Megasoft also has more cash than debt, so we're pretty confident it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Megasoft 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.

In the last year Megasoft had a loss before interest and tax, and actually shrunk its revenue by 29%, to ₹417m. To be frank that doesn't bode well.

So How Risky Is Megasoft?

Although Megasoft had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of ₹50m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. 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. For example, we've discovered 2 warning signs for Megasoft that you should be aware of before investing here.

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.