Persistent Systems (NSE:PERSISTENT) Seems To Use Debt Rather Sparingly

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. 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 A Problem?

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. If things get really bad, the lenders can take control of the business. 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 examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Persistent Systems

What Is Persistent Systems's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Persistent Systems had ₹3.17b of debt in September 2023, down from ₹5.34b, one year before. But on the other hand it also has ₹10.9b in cash, leading to a ₹7.74b net cash position.

A Look At Persistent Systems' Liabilities

The latest balance sheet data shows that Persistent Systems had liabilities of ₹21.2b due within a year, and liabilities of ₹3.07b falling due after that. Offsetting this, it had ₹10.9b in cash and ₹16.2b in receivables that were due within 12 months. So it actually has ₹2.85b more liquid assets than total liabilities.

This state of affairs indicates that Persistent Systems' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the ₹433.3b 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 33% 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 it is future earnings, more than anything, that will determine Persistent Systems'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.

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. During the last three years, Persistent Systems produced sturdy free cash flow equating to 55% of its EBIT, about what we'd expect. 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 ₹7.74b, as well as more liquid assets than liabilities. And we liked the look of last year's 33% year-on-year EBIT growth. So we don't think Persistent Systems's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in Persistent Systems, you may well want to click here to check an interactive graph of its earnings per share history.

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.