Is Megasoft (NSE:MEGASOFT) 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.' 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 can see that Megasoft Limited (NSE:MEGASOFT) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Megasoft

What Is Megasoft's Debt?

The chart below, which you can click on for greater detail, shows that Megasoft had ₹1.47b in debt in March 2024; about the same as the year before. However, because it has a cash reserve of ₹184.9m, its net debt is less, at about ₹1.29b.

A Look At Megasoft's Liabilities

According to the last reported balance sheet, Megasoft had liabilities of ₹259.0m due within 12 months, and liabilities of ₹1.59b due beyond 12 months. Offsetting these obligations, it had cash of ₹184.9m as well as receivables valued at ₹100.0m due within 12 months. So it has liabilities totalling ₹1.57b more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Megasoft has a market capitalization of ₹4.34b, 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. 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 when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Given it has no significant operating revenue at the moment, shareholders will be hoping Megasoft can make progress and gain better traction for the business, before it runs low on cash.

Caveat Emptor

Importantly, Megasoft had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at ₹117m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. For example, we would not want to see a repeat of last year's loss of ₹330m. So in short it's a really risky stock. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Be aware that Megasoft is showing 4 warning signs in our investment analysis , and 2 of those are potentially serious...

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.