Megasoft (NSE:MEGASOFT) Is Carrying A Fair Bit Of Debt

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. Importantly, Megasoft Limited (NSE:MEGASOFT) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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 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 Net Debt?

As you can see below, Megasoft had ₹1.41b of debt at September 2024, down from ₹1.48b a year prior. On the flip side, it has ₹89.8m in cash leading to net debt of about ₹1.32b.

A Look At Megasoft's Liabilities

We can see from the most recent balance sheet that Megasoft had liabilities of ₹694.7m falling due within a year, and liabilities of ₹1.55b due beyond that. Offsetting these obligations, it had cash of ₹89.8m as well as receivables valued at ₹185.0m due within 12 months. So it has liabilities totalling ₹1.97b 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 ₹5.76b, 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.

It seems likely shareholders hope that Megasoft can significantly advance the business plan before too long, because it doesn't have any significant revenue at the moment.

Caveat Emptor

Over the last twelve months Megasoft produced an earnings before interest and tax (EBIT) loss. Indeed, it lost ₹117m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. We would feel better if it turned its trailing twelve month loss of ₹440m into a profit. In the meantime, we consider the stock very risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 4 warning signs we've spotted with Megasoft (including 2 which don't sit too well with us) .

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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