We Think Protean eGov Technologies (NSE:PROTEAN) Can Stay On Top Of Its Debt

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 note that Protean eGov Technologies Limited (NSE:PROTEAN) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Protean eGov Technologies

What Is Protean eGov Technologies's Net Debt?

As you can see below, Protean eGov Technologies had ₹195.0m of debt, at September 2024, which is about the same as the year before. You can click the chart for greater detail. However, its balance sheet shows it holds ₹2.15b in cash, so it actually has ₹1.95b net cash.

How Strong Is Protean eGov Technologies' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Protean eGov Technologies had liabilities of ₹2.73b due within 12 months and liabilities of ₹340.0m due beyond that. Offsetting these obligations, it had cash of ₹2.15b as well as receivables valued at ₹1.98b due within 12 months. So it can boast ₹1.06b more liquid assets than total liabilities.

This surplus suggests that Protean eGov Technologies has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Protean eGov Technologies boasts net cash, so it's fair to say it does not have a heavy debt load!

But the bad news is that Protean eGov Technologies has seen its EBIT plunge 11% in the last twelve months. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Protean eGov Technologies'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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Protean eGov Technologies has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, Protean eGov Technologies recorded free cash flow worth a fulsome 98% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Protean eGov Technologies has net cash of ₹1.95b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of ₹878m, being 98% of its EBIT. So is Protean eGov Technologies's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 2 warning signs with Protean eGov Technologies , and understanding them should be part of your investment process.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.