Persistent Systems (NSE:PERSISTENT) Has A Pretty Healthy Balance Sheet

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. We can see that Persistent Systems Limited (NSE:PERSISTENT) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Persistent Systems

What Is Persistent Systems's Debt?

The image below, which you can click on for greater detail, shows that Persistent Systems had debt of ₹2.63b at the end of September 2024, a reduction from ₹3.17b over a year. However, it does have ₹9.25b in cash offsetting this, leading to net cash of ₹6.62b.

A Look At Persistent Systems' Liabilities

Zooming in on the latest balance sheet data, we can see that Persistent Systems had liabilities of ₹24.2b due within 12 months and liabilities of ₹2.90b due beyond that. On the other hand, it had cash of ₹9.25b and ₹29.2b worth of receivables due within a year. So it can boast ₹11.3b 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 it's very unlikely that the ₹975.1b company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that Persistent Systems has more cash than debt is arguably a good indication that it can manage its debt safely.

Also good is that Persistent Systems grew its EBIT at 14% over the last year, further increasing its ability to manage 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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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 51% 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 Persistent Systems has ₹6.62b in net cash and a decent-looking balance sheet. On top of that, it increased its EBIT by 14% in the last twelve months. So we don't think Persistent Systems's use of debt is risky. 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, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.