Is Ramco Systems (NSE:RAMCOSYS) Weighed On By Its Debt Load?

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 Ramco Systems Limited (NSE:RAMCOSYS) does use debt in its business. But the real question is whether this debt is making the company risky.

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When Is Debt A Problem?

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 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

How Much Debt Does Ramco Systems Carry?

The image below, which you can click on for greater detail, shows that Ramco Systems had debt of ₹599.6m at the end of September 2024, a reduction from ₹811.2m over a year. However, its balance sheet shows it holds ₹797.9m in cash, so it actually has ₹198.4m net cash.

A Look At Ramco Systems' Liabilities

Zooming in on the latest balance sheet data, we can see that Ramco Systems had liabilities of ₹3.07b due within 12 months and liabilities of ₹893.6m due beyond that. Offsetting these obligations, it had cash of ₹797.9m as well as receivables valued at ₹1.12b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹2.05b.

Of course, Ramco Systems has a market capitalization of ₹12.7b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Ramco Systems also has more cash than debt, so we're pretty confident it can manage its debt safely. 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 Ramco Systems can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

View our latest analysis for Ramco Systems

In the last year Ramco Systems wasn't profitable at an EBIT level, but managed to grow its revenue by 8.9%, to ₹5.7b. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is Ramco Systems?

While Ramco Systems lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow ₹504m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. 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. Be aware that Ramco Systems is showing 1 warning sign in our investment analysis , you should know about...

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.