Is Newgen Software Technologies (NSE:NEWGEN) Using Too Much 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.' 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. Importantly, Newgen Software Technologies Limited (NSE:NEWGEN) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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. 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.

See our latest analysis for Newgen Software Technologies

What Is Newgen Software Technologies's Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2023 Newgen Software Technologies had ₹427.1m of debt, an increase on ₹278.2m, over one year. But on the other hand it also has ₹3.40b in cash, leading to a ₹2.97b net cash position.

How Strong Is Newgen Software Technologies' Balance Sheet?

According to the last reported balance sheet, Newgen Software Technologies had liabilities of ₹2.96b due within 12 months, and liabilities of ₹689.8m due beyond 12 months. Offsetting this, it had ₹3.40b in cash and ₹4.72b in receivables that were due within 12 months. So it actually has ₹4.47b more liquid assets than total liabilities.

This surplus suggests that Newgen Software Technologies has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Newgen Software Technologies boasts net cash, so it's fair to say it does not have a heavy debt load!

And we also note warmly that Newgen Software Technologies grew its EBIT by 17% last year, making its debt load easier to handle. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Newgen Software Technologies's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Newgen Software Technologies has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the most recent three years, Newgen Software Technologies recorded free cash flow worth 76% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While it is always sensible to investigate a company's debt, in this case Newgen Software Technologies has ₹2.97b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of ₹1.2b, being 76% of its EBIT. So we don't think Newgen Software Technologies's use of debt is risky. 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 Newgen Software Technologies is showing 1 warning sign in our investment analysis , you should know about...

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.