Oracle Financial Services Software (NSE:OFSS) Has A Rock Solid Balance Sheet

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Oracle Financial Services Software Limited (NSE:OFSS) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Oracle Financial Services Software

How Much Debt Does Oracle Financial Services Software Carry?

As you can see below, at the end of March 2022, Oracle Financial Services Software had ₹833.9m of debt, up from none a year ago. Click the image for more detail. However, its balance sheet shows it holds ₹50.2b in cash, so it actually has ₹49.3b net cash.

How Strong Is Oracle Financial Services Software's Balance Sheet?

According to the last reported balance sheet, Oracle Financial Services Software had liabilities of ₹9.89b due within 12 months, and liabilities of ₹6.46b due beyond 12 months. On the other hand, it had cash of ₹50.2b and ₹15.0b worth of receivables due within a year. So it actually has ₹48.8b more liquid assets than total liabilities.

This surplus suggests that Oracle Financial Services Software is using debt in a way that is appears to be both safe and conservative. Due to its strong net asset position, it is not likely to face issues with its lenders. Simply put, the fact that Oracle Financial Services Software has more cash than debt is arguably a good indication that it can manage its debt safely.

But the other side of the story is that Oracle Financial Services Software saw its EBIT decline by 4.9% over the last year. That sort of decline, if sustained, will obviously make debt harder to handle. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Oracle Financial Services Software's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Oracle Financial Services Software 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. Over the most recent three years, Oracle Financial Services Software recorded free cash flow worth 75% 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 Oracle Financial Services Software has ₹49.3b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 75% of that EBIT to free cash flow, bringing in ₹18b. So we don't think Oracle Financial Services Software's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 1 warning sign we've spotted with Oracle Financial Services Software .

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.