Is Persistent Systems (NSE:PERSISTENT) 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.' 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. As with many other companies Persistent Systems Limited (NSE:PERSISTENT) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Persistent Systems

What Is Persistent Systems's Net Debt?

As you can see below, at the end of June 2022, Persistent Systems had ₹5.72b of debt, up from ₹47.6m a year ago. Click the image for more detail. But it also has ₹10.0b in cash to offset that, meaning it has ₹4.30b net cash.

A Look At Persistent Systems' Liabilities

According to the last reported balance sheet, Persistent Systems had liabilities of ₹17.2b due within 12 months, and liabilities of ₹8.19b due beyond 12 months. On the other hand, it had cash of ₹10.0b and ₹16.6b worth of receivables due within a year. So it actually has ₹1.22b more liquid assets than total liabilities.

Having regard to Persistent Systems' size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the ₹241.5b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Persistent Systems boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Persistent Systems grew its EBIT by 56% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Persistent Systems can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Persistent Systems 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, Persistent Systems recorded free cash flow worth 67% 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 we empathize with investors who find debt concerning, you should keep in mind that Persistent Systems has net cash of ₹4.30b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 56% over the last year. So is Persistent Systems's debt a risk? It doesn't seem so to us. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Persistent Systems's earnings per share history for free.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.