We Think Persistent Systems (NSE:PERSISTENT) Can Manage Its Debt With Ease

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Persistent Systems

How Much Debt Does Persistent Systems Carry?

As you can see below, Persistent Systems had ₹4.29b of debt, at March 2023, which is about the same as the year before. You can click the chart for greater detail. But it also has ₹9.69b in cash to offset that, meaning it has ₹5.41b net cash.

A Look At Persistent Systems' Liabilities

We can see from the most recent balance sheet that Persistent Systems had liabilities of ₹19.6b falling due within a year, and liabilities of ₹6.96b due beyond that. Offsetting these obligations, it had cash of ₹9.69b as well as receivables valued at ₹21.0b due within 12 months. So it can boast ₹4.16b 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 ₹367.4b 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!

In addition to that, we're happy to report that Persistent Systems has boosted its EBIT by 55%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. 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. During the last three years, Persistent Systems produced sturdy free cash flow equating to 62% 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 ₹5.41b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 55% 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, 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.